Bluffing: an equilibrium strategy
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.
|Date of creation:||Nov 1999|
|Contact details of provider:|| Postal: Maynooth, Co. Kildare|
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting
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- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, July.
- Robert A. Jarrow, 2008.
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World Scientific Publishing Co. Pte. Ltd..
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- Franklin Allen & Gary Gorton, 1991. "Stock Price Manipulation, Market Microstructure and Asymmetric Information," NBER Working Papers 3862, National Bureau of Economic Research, Inc.
- Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-282.
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