Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

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Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

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Jie Lu (Rutgers University)
Bruce Mizrach () (Rutgers University)

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Bruce Mizrach

Abstract

We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200701.

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Length: 20 pages
Date of creation: 08 Jan 2007
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Handle: RePEc:rut:rutres:200701

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-03-10 (All new papers)
NEP-MST-2007-03-10 (Market Microstructure)

References listed on IDEAS
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Bruce Mizrach, 2003. "Analyst Recommendations and Nasdaq Market Making Activity," Departmental Working Papers 200307, Rutgers University, Department of Economics. [Downloadable!]
Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
Liang Peng & Gina Nicolosi & Ning Zhu, 2003. "Do Individual Investors Learn from Their Trading Experience?," Yale School of Management Working Papers ysm439, Yale School of Management. [Downloadable!]
Werner Antweiler & Murray Z. Frank, 2004. "Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards," Journal of Finance, American Finance Association, vol. 59(3), pages 1259-1294, 06. [Downloadable!] (restricted)

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