Strategic Trading and Welfare in a Dynamic Market
This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. The author finds that agents trade slowly even when the time between trades goes to zero. In fact, welfare loss due to strategic behavior increases as the time between trades decreases. In the limit when the time between trades goes to zero, welfare loss is of order 1/N, and not 1/N-squared as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case. Copyright 1999 by The Review of Economic Studies Limited.
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Volume (Year): 66 (1999)
Issue (Month): 2 (April)
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