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Strategic Interaction in A Stock Trading Chat Room

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Author Info

  • Jie Lu

    ()
    (Rutgers University)

  • Bruce Mizrach

    ()
    (Rutgers University)

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 establish a symmetric Bayesian Nash 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) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders benefit from following. We test and confirm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201317.

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Length: 20 pages
Date of creation: 16 Jul 2013
Date of revision:
Handle: RePEc:rut:rutres:201317

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Related research

Keywords: chat room; strategic information; individual traders; behavioral finance;

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