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Abstract

This paper studies the relationship between the amount of public information that stock market prices incorporate and the equilibrium behavior of market participants. The analysis is framed in a static, NREE setup where traders exchange vectors of assets accessing multidimensional information under two alternative market structures. In the first (the unrestricted system), both informed and uninformed speculators can condition their demands for each traded asset on all equilibrium prices; in the second (the restricted system), they are restricted to condition their demand on the price of the asset they want to trade. I show that informed traders’ incentives to exploit multidimensional private information depend on the number of prices they can condition upon when submitting their demand schedules, and on the specific price formation process one considers. Building on this insight, I then give conditions under which the restricted system is more efficient than the unrestricted system.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/545.pdf
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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 545.

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Date of creation: May 2001
Date of revision: Nov 2003
Handle: RePEc:upf:upfgen:545

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Financial economics; asset pricing; information and market efficiency;

Other versions of this item:

Find related papers by JEL classification:

• G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
• G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

• NEP-ALL-2001-05-16 (All new papers)
• NEP-FMK-2001-05-16 (Financial Markets)

References

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Citations

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Cited by:

1. Ledyard, John O. & Bossaerts, Peter & Fine, Leslie., 2000. "Inducing Liquidity In Thin Financial Markets Through Combined-Value Trading Mechanisms," Working Papers 1095, California Institute of Technology, Division of the Humanities and Social Sciences.
   
   • Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002. "Inducing liquidity in thin financial markets through combined-value trading mechanisms," European Economic Review, Elsevier, vol. 46(9), pages 1671-1695, October.
2. Giovanni Cespa, 2003. "Giffen Goods and Market Making," CSEF Working Papers 97, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
   
   • Giovanni Cespa, 2005. "Giffen goods and market making," Economic Theory, Springer, vol. 25(4), pages 983-997, 06.
   • Giovanni Cespa, 2002. "Giffen goods and market making," Economics Working Papers 681, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2003.
3. Giovanni Cespa, 2003. "Giffen Goods and Market Making," Working Papers 68, Barcelona Graduate School of Economics.
4. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary, University of London, School of Economics and Finance.
5. Cespa, Giovanni & Foucault, Thierry, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CEPR Discussion Papers 8350, C.E.P.R. Discussion Papers.

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