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Information spillovers in asset markets with correlated values

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Abstract

We study information spillovers in a dynamic setting with privately informed traders and correlated asset values. A trade of one asset (or lack thereof) can provide information about the value of other assets. The information content of trading behavior is endogenously determined in equilibrium. We show that this endogeneity leads to multiple equilibria when the correlation between asset values is sufficiently high. The equilibria are ranked in terms of both trade volume and efficiency. We study the implications for policies that target market transparency as well as the market's ability to aggregate information. Total welfare is higher in any equilibrium of a fully transparent market than in a fully opaque one. However, both welfare and trading activity can decrease in the degree of market transparency. If traders have asymmetric access to transaction data, transparency levels the playing field, reduces the rents of more informed traders, but may also reduce total welfare. Moreover, even in a fully transparent market, information is not necessarily aggregated as the number of informed traders becomes arbitrarily large.

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  • Vladimir Asriyan & William Fuchs & Brett Green, 2015. "Information spillovers in asset markets with correlated values," Economics Working Papers 1482, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2016.
  • Handle: RePEc:upf:upfgen:1482
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    Cited by:

    1. Vladimir Asriyan & William Fuchs & Brett Green, 2017. "Aggregation and design of information in asset markets with adverse selection," Economics Working Papers 1573, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2019.
    2. Eeva Mauring, 2020. "Informational Cycles in Search Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 12(4), pages 170-192, November.
    3. Anton Tsoy, 2016. "Liquidity and Prices in Decentralized Markets with Almost Public Information," 2016 Meeting Papers 8, Society for Economic Dynamics.
    4. Osano, Hiroshi, 2020. "Credit default swaps and market information," Journal of Financial Markets, Elsevier, vol. 48(C).
    5. Vladimir Asriyan, 2017. "Information Aggregation in Dynamic Markets with Adverse Selection," 2017 Meeting Papers 988, Society for Economic Dynamics.
    6. Vladimir Asriyan & Victoria Vanasco, 2019. "Security design in non-exclusive markets with asymmetric information," Economics Working Papers 1712, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Fuchs, William & Öry, Aniko & Skrzypacz, Andrzej, 2016. "Transparency and distressed sales under asymmetric information," Theoretical Economics, Econometric Society, vol. 11(3), September.
    8. Braz Camargo & Kyungmin Kim & Benjamin Lester, 2016. "Information Spillovers, Gains from Trade, and Interventions in Frozen Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1291-1329.
    9. Gündüz, Yalin & Ottonello, Giorgio & Pelizzon, Loriana & Schneider, Michael & Subrahmanyam, Marti G., 2018. "Lighting up the dark: Liquidity in the German corporate bond market," SAFE Working Paper Series 230, Leibniz Institute for Financial Research SAFE.
    10. Tsoy, Anton, 2018. "Alternating-offer bargaining with the global games information structure," Theoretical Economics, Econometric Society, vol. 13(2), May.

    More about this item

    Keywords

    asymmetric information; information spillovers; market transparency; liquidity.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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