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Heterogeneous Noisy Beliefs and Dynamic Competition in Financial Markets

Listed author(s):
  • Fabrice Rousseau

    ()

    (Department of Economics, Finance and Accounting, Maynooth University.)

  • Hervé Boco

    (University of Toulouse Toulouse Business School ISAE)

  • Laurent Germain

    (Workplace-Name:University of Toulouse Toulouse Business School ISAE)

This paper analyzes the competition of heterogeneously informed traders in a multi-auction setting. We obtain that the competition can take different forms depending on the number of traders, trading rounds and the noise in the information. When the number of traders is small and the number of trading rounds is large, traders may trade very aggressively at the opening and at the end of the trading day with lower trading intensity in between. Hence, we can explain volume patterns by the nature of the competition between traders rather than by pattern in the level of liquidity. We find that the noise in the signal may be beneficial for traders when the competition is strong as it gives them a monopolistic position on their private information. The amount of noise maximizing the trader’s expected profit increases with the number of trading rounds as well as the number of traders. This implies that the value of information is closely related to the market where that information is subsequently being used.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N269-16.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n269-16.pdf.

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Length: 41 pages
Date of creation: 2016
Handle: RePEc:may:mayecw:n269-16.pdf
Contact details of provider: Postal:
Maynooth, Co. Kildare

Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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