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Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information

  • Foster, F. Douglas
  • Viswanathan, S.

A dynamic model of strategic trading with two asymmetrically informed traders is analyzed where one informed trader knows the information seen by both informed traders, and the other informed trader only knows his private information. While the first informed trader is better informed, the second informed trader can make inferences about this extra information; in fact, the second informed trader can make sharper inferences from the order flow than the market maker about the extra information. In this setting, competition among the informed traders has a very interesting form. The informed trader with the additional information trades less intensely on that information early on, and both informed traders trade very intensely on their common information. This makes it more difficult for the trader with less information to learn about the information he does not have. When there are only a few remaining trading periods and the information known to both traders has largely been revealed through their trading, then the trader with the additional information trades more intensely on the basis of his private information.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 29 (1994)
Issue (Month): 04 (December)
Pages: 499-518

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Handle: RePEc:cup:jfinqa:v:29:y:1994:i:04:p:499-518_00
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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  1. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  2. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  3. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
  4. 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.
  5. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March.
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