IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v51y1996i4p1437-78.html
   My bibliography  Save this article

Strategic Trading When Agents Forecast the Forecasts of Others

Author

Listed:
  • Foster, F Douglas
  • Viswanathan, S

Abstract

The authors analyze a multiperiod model of trading with differentially informed traders, liquidity traders, and a marketmaker. Each informed trader's initial information is a noisy estimate of the long-term value of the asset and the different signals received by informed traders can have a variety of correlation structures. With this setup, informed traders not only compete with each other for trading profits, they also learn about other traders' signals from the observed order flow. The authors' work suggests that the initial correlation among the informed traders' signals has a significant effect on the informed traders' profits and the informativeness of prices. Copyright 1996 by American Finance Association.

Suggested Citation

  • Foster, F Douglas & Viswanathan, S, 1996. "Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
  • Handle: RePEc:bla:jfinan:v:51:y:1996:i:4:p:1437-78
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0022-1082%28199609%2951%3A4%3C1437%3ASTWAFT%3E2.0.CO%3B2-Z&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Foster, F Douglas & Viswanathan, S, 1995. "Can Speculative Trading Explain the Volume-Volatility Relation?," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 379-396, October.
    2. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-972.
    3. Xavier Vives, 1993. "How Fast do Rational Agents Learn?," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 329-347.
    4. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. "Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-270, March.
    5. Foster, F. Douglas & Viswanathan, S., 1994. "Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(4), pages 499-518, December.
    6. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
    7. Foster, F Douglas & Viswanathan, S, 1993. "The Effect of Public Information and Competition on Trading Volume and Price Volatility," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 23-56.
    8. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    9. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    11. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, vol. 56(4), pages 851-876, July.
    12. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    13. Dimitri Vayanos, 1993. "A Dynamic Model of an Imperfectly Competitive Bid-Ask Market," CEPR Financial Markets Paper 0040, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX..
    14. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
    15. Chan, Kalok & Chung, Y. Peter & Johnson, Herb, 1995. "The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(3), pages 329-346, September.
    16. Brennan, Michael J & Jegadeesh, Narasimhan & Swaminathan, Bhaskaran, 1993. "Investment Analysis and the Adjustment of Stock Prices to Common Information," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 799-824.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    2. Pascual, Roberto & Escribano, Álvaro & Tapia, Mikel, 2000. "Adverse selection costs, trading activity and liquidity in the NYSE: an empirical analysis in a dynamic context," UC3M Working papers. Economics 7276, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Wu, Chunchi & Xu, Xiaoqing Eleanor, 2000. "Return Volatility, Trading Imbalance and the Information Content of Volume," Review of Quantitative Finance and Accounting, Springer, vol. 14(2), pages 131-153, March.
    4. H. Henry Cao & Hui Ou-Yang, 2009. "Differences of Opinion of Public Information and Speculative Trading in Stocks and Options," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 299-335, January.
    5. Albert Wang, F., 1998. "Strategic trading, asymmetric information and heterogeneous prior beliefs," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 321-352, September.
    6. Medrano, Luis Angel & Vives, Xavier, 2001. "Strategic Behavior and Price Discovery," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 221-248, Summer.
    7. Dan Bernhardt & P. Seiler & B. Taub, 2010. "Speculative dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 1-52, July.
    8. Chiu, Yen-Chen, 2020. "Macroeconomic uncertainty, information competition, and liquidity," Finance Research Letters, Elsevier, vol. 34(C).
    9. Pascual, Roberto & Escribano, Álvaro & Tapia, Mikel, 1999. "How does liquidity behave? A multidimensional analysis of NYSE stocks," DEE - Working Papers. Business Economics. WB 6433, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    10. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-972.
    11. Qin Lei & Xuewu Wang, 2014. "Time†Varying Liquidity Trading, Private Information and Insider Trading," European Financial Management, European Financial Management Association, vol. 20(2), pages 321-351, March.
    12. Choi, Jin Hyuk & Larsen, Kasper & Seppi, Duane J., 2019. "Information and trading targets in a dynamic market equilibrium," Journal of Financial Economics, Elsevier, vol. 132(3), pages 22-49.
    13. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    14. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    15. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    16. Sastry, Ravi & Thompson, Rex, 2019. "Strategic trading with risk aversion and information flow," Journal of Financial Markets, Elsevier, vol. 44(C), pages 1-16.
    17. Mougoué, Mbodja & Aggarwal, Raj, 2011. "Trading volume and exchange rate volatility: Evidence for the sequential arrival of information hypothesis," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2690-2703, October.
    18. Ardalan, Kavous, 1998. "Financial markets with asymmetric information: An expository review of seminal models," International Review of Economics & Finance, Elsevier, vol. 7(1), pages 23-51.
    19. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017.
    20. Lof, Matthijs & Bommel, Jos van, 2018. "Asymmetric information and the distribution of trading volume," Research Discussion Papers 1, Bank of Finland.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:51:y:1996:i:4:p:1437-78. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.