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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 Department Working Paper Series n981099, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n981099
    as

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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..
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    More about this item

    Keywords

    Trade-Based Manipulation; Bluffing; Dealer Market.;
    All these keywords.

    JEL classification:

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

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