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Information Percolation in Segmented Markets

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  • Darrell Duffie
  • Semyon Malamud
  • Gustavo Manso

Abstract

We calculate equilibria of dynamic double-auction markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors are segmented into groups that differ with respect to characteristics determining information quality, including initial information precision as well as market "connectivity," the expected frequency of their trading opportunities. Investors with superior information sources attain strictly higher expected profits, provided their counterparties are unable to observe the quality of those sources. If, however, the quality of bidders' information sources are commonly observable, then, under conditions, investors with superior information sources have strictly lower expected profits.

Suggested Citation

  • Darrell Duffie & Semyon Malamud & Gustavo Manso, 2011. "Information Percolation in Segmented Markets," NBER Working Papers 17295, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17295 Note: AP
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    References listed on IDEAS

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    Cited by:

    1. Taneli Mäkinen & Francesco Palazzo, 2017. "The double bind of asymmetric information in over-the-counter markets," Temi di discussione (Economic working papers) 1128, Bank of Italy, Economic Research and International Relations Area.
    2. repec:eee:jetheo:v:174:y:2018:i:c:p:124-183 is not listed on IDEAS
    3. Hanson, Samuel G. & Sunderam, Adi, 2013. "Are there too many safe securities? Securitization and the incentives for information production," Journal of Financial Economics, Elsevier, vol. 108(3), pages 565-584.
    4. Duffie, Darrell & Qiao, Lei & Sun, Yeneng, 2015. "Dynamic Directed Random Matching," Research Papers 3359, Stanford University, Graduate School of Business.
    5. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2014. "Information percolation in segmented markets," Journal of Economic Theory, Elsevier, vol. 153(C), pages 1-32.
    6. Attanasi, Giuseppe & Centorrino, Samuele & Moscati, Ivan, 2016. "Over-the-counter markets vs. double auctions: A comparative experimental study," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 63(C), pages 22-35.
    7. Du, Songzi & Zhu, Haoxiang, 2017. "Bilateral trading in divisible double auctions," Journal of Economic Theory, Elsevier, vol. 167(C), pages 285-311.
    8. Rosenthal, Dale W.R. & Thomas, Nordia Diana Marie, 2012. "Transact taxes in a price maker/taker market," MPRA Paper 40556, University Library of Munich, Germany.
    9. Semyon Malamud & Marzena Rostek, 2012. "Decentralized Exchange," Working Papers 12-18, NET Institute.
    10. Andrea Barbon & Marco Di Maggio & Francesco Franzoni & Augustin Landier, 2017. "Brokers and Order Flow Leakage: Evidence from Fire Sales," NBER Working Papers 24089, National Bureau of Economic Research, Inc.
    11. Andrei, Daniel & Cujean, Julien, 2017. "Information percolation, momentum and reversal," Journal of Financial Economics, Elsevier, vol. 123(3), pages 617-645.
    12. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    13. Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    14. Marco Di Maggio & Francesco Franzoni & Amir Kermani & Carlo Sommavilla, 2017. "The Relevance of Broker Networks for Information Diffusion in the Stock Market," NBER Working Papers 23522, National Bureau of Economic Research, Inc.
    15. Uslu, Semih, 2015. "Pricing and Liquidity in Decentralized Asset Markets," MPRA Paper 73901, University Library of Munich, Germany, revised 21 Sep 2016.
    16. repec:eee:jetheo:v:174:y:2018:i:c:p:16-56 is not listed on IDEAS
    17. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2015. "Reprint of: Information percolation in segmented markets," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 838-869.
    18. Chague, Fernando & De-Losso, Rodrigo & De Genaro, Alan & Giovannetti, Bruno, 2017. "Well-connected short-sellers pay lower loan fees: A market-wide analysis," Journal of Financial Economics, Elsevier, vol. 123(3), pages 646-670.
    19. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.

    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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