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Decentralized Trading with Private Information

  • Mikhail Golosov
  • Guido Lorenzoni
  • Aleh Tsyvinski

The paper studies asset pricing in informationally decentralized markets. These markets have two key frictions: trading is decentralized (bilateral), and some agents have private information. We analyze how uninformed agents acquire information over time from their bilateral trades. In particular, we show that uninformed agents can learn all the useful information in the long run and that the long-run allocation is Pareto efficient. We then explore how informed agents can exploit their informational advantage in the short run and provide sufficient conditions for the value of information to be positive. Finally, we provide a numerical analysis of the equilibrium trading dynamics and prices.

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File URL: http://www.nber.org/papers/w15513.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15513.

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Date of creation: Nov 2009
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Handle: RePEc:nbr:nberwo:15513
Note: AP EFG
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  1. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2010. "The relative contributions of private information sharing and public information releases to information aggregation," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1574-1601, July.
  2. Dimitri Vayanos & Pierre-Olivier Weill, 2005. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics 459, London School of Economics and Political Science, LSE Library.
  3. Ostrovsky, Michael, 2009. "Information Aggregation in Dynamic Markets with Strategic Traders," Research Papers 2053, Stanford University, Graduate School of Business.
  4. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
  5. Pierre-Olivier Weill & Guillaume Rocheteau & Ricardo Lagos, 2007. "Crashes and Recoveries in Illiquid Markets," 2007 Meeting Papers 981, Society for Economic Dynamics.
  6. Pierre-Olivier Weill, 2004. "Liquidity Premia in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 648, Econometric Society.
  7. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2006. "Valuation in Over-the-Counter Markets," NBER Working Papers 12020, National Bureau of Economic Research, Inc.
  8. Douglas Gale, 2010. "Limit theorems for markets with sequential bargaining," Levine's Working Paper Archive 621, David K. Levine.
  9. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland.
  10. Fudenberg, Drew & Levine, David K., 1995. "Consistency and cautious fictitious play," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1065-1089.
  11. Wolinsky, Asher, 1987. "Information Revelation in a Market with Pairwise Meetings," The Warwick Economics Research Paper Series (TWERPS) 284, University of Warwick, Department of Economics.
  12. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  13. Blouin, Max R & Serrano, Roberto, 2001. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 323-46, April.
  14. Gale,Douglas, 2000. "Strategic Foundations of General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521643306.
  15. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  16. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  17. Manuel Amador & Pierre-Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," NBER Working Papers 14255, National Bureau of Economic Research, Inc.
  18. Darrell Duffie & Gustavo Manso, 2007. "Information Percolation in Large Markets," American Economic Review, American Economic Association, vol. 97(2), pages 203-209, May.
  19. Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, . "Information Percolation with Equilibrium Search Dynamics," Swiss Finance Institute Research Paper Series 09-02, Swiss Finance Institute.
  20. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
  21. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper 0901, Federal Reserve Bank of Cleveland.
  22. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
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