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Asset price manipulation with several traders

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  • Walther, A.

Abstract

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.

Suggested Citation

  • Walther, A., 2012. "Asset price manipulation with several traders," Cambridge Working Papers in Economics 1242, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1242
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    References listed on IDEAS

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    More about this item

    Keywords

    Price manipulation; asset pricing; asymmetric information; Glosten-Milgrom model;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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