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Bluffing: an equilibrium strategy

Author

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  • Fabrice Rousseau;

    () (Economics, National University of Ireland, Maynooth)

Abstract

The present work studies the behavior of a monopolistic informed trader in a two-period competitive dealer market. We show that the informed trader may engage in stock price manipulation as a result of the exploitation of his informational advantage (sufficient conditions are provided). The informed trader achieves this manipulation by not trading in the first period according to the information received. This trader attempts to jam his signal or to bluff. In equilibrium this behavior is anticipated by the market maker, but still the informed continues to bluff with a positive probability. Equilibria with bluffing behavior are mixed strategies equilibria where the informed both follows and jams his information with positive probabilities. We also show that under those sufficient conditions, a pure strategy equilibrium where the informed does not bluff does not exist.

Suggested Citation

  • Fabrice Rousseau;, 1999. "Bluffing: an equilibrium strategy," Economics, Finance and Accounting Department Working Paper Series n981099, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n981099
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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N981099.pdf
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    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130 World Scientific Publishing Co. Pte. Ltd..
    2. Allen, Franklin & Gorton, Gary, 1992. "Stock price manipulation, market microstructure and asymmetric information," European Economic Review, Elsevier, vol. 36(2-3), pages 624-630, April.
    3. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-282.
    4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Trade-Based Manipulation; Bluffing; Dealer Market.;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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