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Communication Dilemma in Speculative Markets

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Author Info
Nevzat Eren ()
Han N. Ozsoylev ()

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Abstract

We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.

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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2006fe08.

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Length: 39
Date of creation: 2006
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Handle: RePEc:sbs:wpsefe:2006fe08

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  1. Shiller, 021Robert J. & Pound, John, 1989. "Survey evidence on diffusion of interest and information among investors," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 47-66, August. [Downloadable!] (restricted)
  2. Gary Charness & Ernan Haruvy & Doron Sonsino, . "Social Distance and Reciprocity: The Internet vs. the Laboratory," University of California Santa Barbara - Department of Economics 10-01, California Santa Barbara - Department of Economics. [Downloadable!]
  3. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September. [Downloadable!] (restricted)
  4. Bisin, Alberto & Horst, Ulrich & Ozgur, Onur, 2006. "Rational expectations equilibria of economies with local interactions," Journal of Economic Theory, Elsevier, vol. 127(1), pages 74-116, March. [Downloadable!] (restricted)
  5. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(3), pages 503-29. [Downloadable!] (restricted)
  6. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August. [Downloadable!] (restricted)
  7. Sanford J. Grossman & Joseph E. Stiglitz, 1980. "On the Impossibility of Informationally Efficient Markets," NBER Reprints 0121, National Bureau of Economic Research, Inc.
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  8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  9. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2004. "Social Interaction and Stock-Market Participation," Journal of Finance, American Finance Association, vol. 59(1), pages 137-163, 02. [Downloadable!] (restricted)
  10. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August. [Downloadable!] (restricted)
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  11. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-28, July. [Downloadable!] (restricted)
  12. Esther Duflo & Emmanuel Saez, 2002. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," NBER Working Papers 8885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Duflo, Esther & Saez, Emmanuel, 2002. "Participation and investment decisions in a retirement plan: the influence of colleagues' choices," Journal of Public Economics, Elsevier, vol. 85(1), pages 121-148, July. [Downloadable!] (restricted)
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