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Asset price manipulation with several traders

  • Walther, A.

In financial markets with asymmetric information, traders may have an incentive to forgo profitable deals today in order to preserve their informational advantage for future deals. This sort of manipulative behaviour has been studied in markets with one informed trader (Kyle 1985, Chakraborty and Yilmaz 2004). The effect is slower social learning. Using an extension of Glosten and Milgrom’s (1985) trading model, we study this effect in markets with N informed traders. As N grows large, each trader’s price impact subsides, and so does manipulation in equilibrium. However, the impact of manipulation on social learning can be increasing in N. As N increases, each trader individually manipulates less. But nonetheless, the increased number of manipulative actions introduces enough noise to exacerbate the impact of manipulation on learning.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1242.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1242.

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Date of creation: 08 Oct 2012
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Handle: RePEc:cam:camdae:1242
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  2. repec:cup:cbooks:9780521824019 is not listed on IDEAS
  3. repec:cup:cbooks:9780521530927 is not listed on IDEAS
  4. Andreas Park & Hamid Sabourian, 2011. "Herding and Contrarian Behavior in Financial Markets," Econometrica, Econometric Society, vol. 79(4), pages 973-1026, 07.
  5. Malinova, Katya & Park, Andreas, 2014. "The impact of competition and information on intraday trading," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 55-71.
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