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Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

  • Jie Lu

    (Rutgers University)

  • Bruce Mizrach

    ()

    (Rutgers University)

We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200701.

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Length: 20 pages
Date of creation: 08 Jan 2007
Date of revision:
Handle: RePEc:rut:rutres:200701
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  1. Gina Nicolosi & Liang Peng & Ning Zhu, 2003. "Do Individual Investors Learn from Their Trading Experience?," Yale School of Management Working Papers ysm439, Yale School of Management, revised 01 Sep 2009.
  2. Bruce Mizrach, 2003. "Analyst Recommendations and Nasdaq Market Making Activity," Departmental Working Papers 200307, Rutgers University, Department of Economics.
  3. Werner Antweiler & Murray Z. Frank, 2004. "Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards," Journal of Finance, American Finance Association, vol. 59(3), pages 1259-1294, 06.
  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
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