IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v192y2021ics0022053120301629.html
   My bibliography  Save this article

Rational destabilization in a frictionless market

Author

Listed:
  • Sadzik, Tomasz
  • Woolnough, Chris

Abstract

This paper studies the effect of informed trading on prices in a dynamic model with two-dimensional private information. We show that a trader with private information about the asset's value and a persistent liquidity shock trades along with and exacerbates the shock. The price changes more than if the shock was unexpected. When shocks are small, the with-wind trade is so strong that the distribution of prices and asset holdings changes discontinuously from the stabilizing linear equilibrium without them. The results demonstrate strategic price destabilization in a market with no capital or trade frictions.

Suggested Citation

  • Sadzik, Tomasz & Woolnough, Chris, 2021. "Rational destabilization in a frictionless market," Journal of Economic Theory, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:jetheo:v:192:y:2021:i:c:s0022053120301629
    DOI: 10.1016/j.jet.2020.105169
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053120301629
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2020.105169?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sadzik, Tomasz & Woolnough, Chris, 2021. "Snowballing private information," Journal of Economic Theory, Elsevier, vol. 198(C).

    More about this item

    Keywords

    Asymmetric information; Multidimensional signals; Market microstructure; Arbitrage; Front-running;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    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:eee:jetheo:v:192:y:2021:i:c:s0022053120301629. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.