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Strategic Behaviour and Price Discovery

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Listed:
  • Medrano, Luis Angel
  • Vives, Xavier

Abstract

The paper analyses the effects of strategic behaviour by an insider in a price discovery process, akin to an information tâtonnement, in the presence of a competitive informed sector. Such processes are used in the pre-opening period of continuous trading systems in several exchanges. It is found that the insider manipulates the market using a contrarian strategy in order to neutralize the effect of the trades of competitive informed agents. Furthermore, consistent with the empirical evidence available, we find that information revelation accelerates close to the opening; that the market price does not converge to the fundamental value no matter how many rounds the tâtonnement has; and that the expected trading volume displays a U-shaped pattern. We also find that a market with a larger competitive sector (smaller insider) has an improved informational efficiency and an increased trading volume. The insider provides a public good (reducing the informativeness of the price) for the competitive informed sector.

Suggested Citation

  • Medrano, Luis Angel & Vives, Xavier, 1997. "Strategic Behaviour and Price Discovery," CEPR Discussion Papers 1768, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1768
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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