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Information linkages and correlated trading

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  • Colla, Paolo
  • Mele, Antonio

Abstract

In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase. Moreover, we find that information linkages improve or damage market depth, and lower or boost the traders’ profits, according to whether these linkages convey positively or negatively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by “neighbor” traders are positively correlated and trades generated by “distant” traders are negatively correlated.

Suggested Citation

  • Colla, Paolo & Mele, Antonio, 2008. "Information linkages and correlated trading," LSE Research Online Documents on Economics 24439, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24439
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    File URL: http://eprints.lse.ac.uk/24439/
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Paolo Colla & Antonio Mele, 2010. "Information Linkages and Correlated Trading," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 203-246, January.
    2. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
    3. repec:eee:pacfin:v:48:y:2018:i:c:p:186-209 is not listed on IDEAS
    4. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
    5. Kellard, Neil & Millo, Yuval & Simon, Jan & Engel, Ofer, 2017. "Close communications: hedge funds, brokers and the emergence of herding," LSE Research Online Documents on Economics 64766, London School of Economics and Political Science, LSE Library.
    6. repec:eee:jfinec:v:128:y:2018:i:1:p:183-206 is not listed on IDEAS
    7. Dakshina Garfield De Silva & Marina Gertsberg & Georgia Kosmopoulou & Rachel Pownall, 2017. "Dealer Networks in the World of Art," Working Papers 198144199, Lancaster University Management School, Economics Department.
    8. Menkhoff, Lukas & Schmeling, Maik, 2010. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1283-1302, November.
    9. repec:rsr:supplm:v:65:y:2017:i:4:p:9-14 is not listed on IDEAS
    10. Jeremy C. Stein, 2008. "Conversations among Competitors," American Economic Review, American Economic Association, vol. 98(5), pages 2150-2162, December.
    11. repec:eee:jfinec:v:125:y:2017:i:1:p:200-215 is not listed on IDEAS
    12. Marco Di Maggio & Francesco Franzoni & Amir Kermani & Carlo Sommavilla, 2017. "The Relevance of Broker Networks for Information Diffusion in the Stock Market," NBER Working Papers 23522, National Bureau of Economic Research, Inc.
    13. Halim, Edward & Riyanto, Yohanes Eko & Roy, Nilanjan, 2017. "Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence," MPRA Paper 80658, University Library of Munich, Germany.
    14. repec:eee:phsmap:v:496:y:2018:i:c:p:505-513 is not listed on IDEAS
    15. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    16. Rothonis, Stephanie & Tran, Duy & Wu, Eliza, 2016. "Does national culture affect the intensity of volatility linkages in international equity markets?," Research in International Business and Finance, Elsevier, vol. 36(C), pages 85-95.
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    18. Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
    19. Cho, Myeonghwan & Jun, Byung-hill, 2013. "Information sharing with competition," Economics Letters, Elsevier, vol. 119(1), pages 81-84.
    20. Nicolas S. Lambert & Michael Ostrovsky & Mikhail Panov, 2014. "Strategic Trading in Informationally Complex Environments," NBER Working Papers 20516, National Bureau of Economic Research, Inc.
    21. Babus, Ana & Hu, Tai-Wei, 2017. "Endogenous intermediation in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 125(1), pages 200-215.
    22. Gray, Wesley, 2008. "Information Exchange and the Limits of Arbitrage," MPRA Paper 11918, University Library of Munich, Germany, revised 31 Nov 2008.
    23. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.

    More about this item

    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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