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Strategic Interaction in A Stock Trading Chat Room

Author

Listed:
  • Jie Lu

    () (Rutgers University)

  • Bruce Mizrach

    () (Rutgers University)

Abstract

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 establish a symmetric Bayesian Nash 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) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders benefit from following. We test and confirm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.

Suggested Citation

  • Jie Lu & Bruce Mizrach, 2013. "Strategic Interaction in A Stock Trading Chat Room," Departmental Working Papers 201317, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201317
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    More about this item

    Keywords

    chat room; strategic information; individual traders; behavioral finance;

    JEL classification:

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

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