Stock market dynamics with rational liquidity traders

In the Kyle (1985) finite horizon model of stock market dynamics with a trader who holds long-lived information, informed trading intensities rise with time, and the slopes of the equilibrium price schedules fall. This paper shows that this result depends crucially on the irrational liquidity trader assumption. We replace the irrational noise traders with a sequence of rational, risk averse, liquidity traders who receive endowment shocks to their holdings of the risky asset. We demonstrate that unless liquidity traders are sufficiently risk averse, the slope of equilibrium price schedule rises over time, while informed trading intensities fall. In particular, Kyle's result holds only when liquidity traders are so risk averse that they ‘over-rebalance’ their portfolio's holdings of the risky asset, so that their final holdings of the risky asset have the opposite sign of their initial position.     

Do market prices reveal the decision models of sophisticated investors?: Evidence from the laboratory

If security prices are fully revealing, then all public information should be reflected in prices, and unsophisticated traders may be able to learn how various types of information affect security valuation by observing prices. A series of laboratory asset markets was conducted to examine whether unsophisticated traders are able to learn to evaluate publicly released information by trading with and observing trades made by a sophisticated trader who knows the valuation implications of the information. We find that unsophisticated traders who participate in an asset market with a sophisticated trader show significant improvement in their ability to use public information on a subsequent price estimation task. Conversely, a control group consisting only of unsophisticated traders shows no improvement. We conclude that market prices convey the sophisticated trader’s private information in a manner that permits unsophisticated investors to learn the stock price implications of a public information release.     

Multimarket trading and market liquidity

When a security trades at multiple locations simultaneously,an informed trader has several avenues in which to exploit hisprivate information. The greater the proportion of liquiditytrading by 'large' traders who can split their trades acrossmarkets, the larger is the correlation between volume in differentmarkets and the smaller is the informativeness of prices. Weshow that one of the markets emerges as the dominant locationfor trading in that security. When informed traders can usetheir information for more than one trading period, the timelyrelease of price information by market informed traders expectto make subsequently at other locations. Markets makers, competingto offer the lowest cost of trading at their location, consequentlydeter informal trading by voluntarily making the price informationpublic and by 'cracking down' on insider trading.     

The effect of sequential information releases on trading volume and price behaviour

This paper examines a two-period setting in which each trader receives a private signal, possibly different, in each period before he trades. The principal objectives are threefold. First, we describe the risky asset demands and price reactions in a noisy rational expectations equilibrium where the time 1 average private signal is not revealed by the price sequence but the time 2 average private signal is. Secondly, we analyse how informed trading volume is affected by the revealed information and supply shocks when pure noise trading volume is uncorrected with observable market variables. Our result indicates that no trade occurs for informed traders when net supply remains fixed across rounds of trade. And, when supply shocks are random, trading volume is induced by the informed and the noise traders, but noise trading is not predictable. Finally, we investigate these properties in the case when pure noise trading volume is correlated with observable market variables. It is shown that no informed trading takes place when there is no supply shock. However, when net supply contains random shocks, trading volume consists of noise and informed trading, both of which can be estimated.     

PRIVATE INFORMATION ACQUISITION IN EXPERIMENTAL MARKETS PRONE TO BUBBLE AND CRASH

This paper reports the results of twelve experimental markets designed to investigate whether a costly private information system decreases the propensity of price bubbles to form. A private information system is hypothesized to decrease traders' subjective uncertainty about the behavior of other traders by reinforcing common expectations for all traders. Results show that private information does not eliminate price bubbles, but asset prices converge toward the rational expectations predictions with trader experience. The price of private information is related to the expected gains derived from asset trading.     

Large traders,hidden arbitrage,and complete markets

This paper studies hidden arbitrage opportunities in markets where large traders affect the price process, and where the market is complete (in the classical sense). The arbitrage opportunities are “hidden” because they occur on a small set of times (typically of Lebesgue measure zero). These arbitrage opportunities occur naturally in markets where a large trader supports the price of some asset or commodity, for example corporate stock repurchase plans, government interest rate or foreign currency intervention, and price support by investment banks in IPOs. We also illustrate immediate arbitrage opportunities generated by usual market activity at specific points in time, for example the issuance date of an IPO or the inclusion date of a new stock in the S&P 500 index.     

Whose trades convey information? Evidence from a cross-section of traders

This paper contributes empirically to our understanding of informed traders. It analyzes traders’ characteristics in a foreign exchange electronic limit order market via anonymous trader identities. We use six indicators of informed trading in a cross-sectional multivariate approach to identify traders with high price impact. More information is conveyed by those traders’ trades which—simultaneously—use medium-sized orders (practice stealth trading), have large trading volume, are located in a financial center, trade early in the trading session, at times of wide spreads and when the order book is thin.     

The “make or take” decision in an electronic market: Evidence on the evolution of liquidity

This paper uses experimental asset markets to investigate the evolution of liquidity in an electronic limit order market. Our market setting includes salient features of electronic limit order markets, as well as informed traders and liquidity traders. We focus on the strategies of the traders and how these are affected by trader type, characteristics of the market, and characteristics of the asset. We find that informed traders use more limit orders than do liquidity traders. Our main result is that liquidity provision shifts as trading progresses, with informed traders increasingly providing liquidity in markets. The change in the behavior of the informed traders seems to be in response to the dynamic adjustment of prices to information; they take (provide) liquidity when the value of their information is high (low). Thus, a market-making role emerges endogenously in our electronic markets and is ultimately adopted by the traders who are least subject to adverse selection when placing limit orders.     

Financial Markets Where Traders Neglect the Informational Content of Prices

We model a financial market where some traders of a risky asset do not fully appreciate what prices convey about others' private information. Markets comprising solely such “cursed” traders generate more trade than those comprising solely rationals. Because rationals arbitrage away distortions caused by cursed traders, mixed markets can generate even more trade. Per‐trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices, even when they dismiss it as noisier than their own. Making private information public raises rational and “dismissive” volume, but reduces cursed volume given moderate noninformational trading motives.     

Strategic trading, asymmetric information and heterogeneous prior beliefs

We develop a multi-period trading model in which traders face both asymmetric information and heterogeneous prior beliefs. Heterogeneity arises because traders agree to disagree on the precision of an informed trader's private signal. In equilibrium, the informed trader smooths out her trading on asymmetric information gradually over time, but concentrates her entire trading on heterogeneous beliefs toward the last few periods. As a result, the model's volume dynamics are consistent with the U-shaped intraday pattern at the close. Furthermore, the model predicts a positive autocorrelation in trading volume, and a positive correlation between trading volume and contemporaneous price volatility.     

A theory of the interday variations in volume, variance, and trading costs in securities markets

In an adverse selection model of a securities market with oneinformed trader and several liquidity traders, we study theimplications of the assumption that the informed trader hasmore information on Monday than on other days. We examine theinterday variations in volume, variance, and adverse selectioncosts, and find that on monday the trading costs and the varianceof price changes are highest, and the volume is lower than onTuesday. These effects are stronger for firms with better publicreporting and for firms with more discretionary liquidity trading.     

并购重组前的知情交易行为研究

并购重组中基于内幕信息的知情交易行为既是监管重点,也是学术界关注的热点问题。本文以2006—2020年我国上市公司并购重组事件为样本,考察并购重组前的知情交易行为对并购公告收益的影响。研究发现：并购重组前的知情交易行为引发了主并公司股价的提前反应,从而降低了并购公告时的市场反应,这一现象是由内幕信息泄露引起,且内幕信息主要来源于包括员工在内的公司内部人,而非机构投资者。进一步分析表明,改善信息环境可以有效缓解并购重组的信息泄露问题,体现为知情购买交易的信息泄露效应受到分析师跟踪、审计质量和问询函制度的有效制约。本文研究深化了现有的并购重组内幕交易行为研究,为实施精准监管和防范内幕交易等政策提供了一定参考和依据。     

投资者异质性与证券市场定价——理论模型与中国的经验证据

本文从投资者异质性的客观现实出发,通过对投资者二维视角的交叉分类与相关行为的探讨,提出了一种按交易特点与行为依据的新的分类方案,即将投资者分为套利交易者、价格预期交易者和量能变动交易者三类。在此基础上分别建立了各类投资者的需求函数,通过对证券市场供求函数的讨论,利用均衡分析方法构建了基于投资者异质性的证券市场定价模型,并以我国证券市场1999-2011年的月度数据为样本进行了实证分析。实证结果表明:我国证券市场价格主要由价格预期交易者的诱导性策略行为与量能变动交易者的羊群行为决定,套利交易者的套利行为对市场价格没有显著的影响,证券市场扩容也未对市场价格的形成产生系统性冲击。     

Predatory Trading

This paper studies predatory trading, trading that induces and/or exploits the need of other investors to reduce their positions. We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed. Further, a trader profits from triggering another trader's crisis, and the crisis can spill over across traders and across markets.     

Information aggregation in a noisy rational expectations economy

This paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset. Each trader conditions his estimate of the return both on his own private source of information and price, which in equilibrium serves as a ‘noisy’ aggregator of the total information observed by all traders. A closed-form characterization of the rational expectations equilibrium is presented. A counter-example to the existence of ‘fully revealing’ equilibrium is developed.     

Imperfect Competition among Informed Traders

We analyze competition among informed traders in the continuous-time Kyle(1985) model, as Foster and Viswanathan (1996) do in discrete time. We explicitly describe the unique linear equilibrium when signals are imperfectly correlated and confirm the conjecture of Holden and Subrahmanyam (1992) that there is no linear equilibrium when signals are perfectly correlated. One result is that at some date, and at all dates thereafter, the market would have been more informationally efficient had there been a monopolist informed trader instead of competing traders. The relatively large amount of private information remaining near the end of trading causes the market to approach complete illiquidity.     

Inference,arbitrage, and asset price volatility

Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between “inference” and “arbitrage”: they would like to buy assets in response to temporary price declines—the arbitrage effect—but sell when prices decline permanently—the inference effect. In equilibrium, the presence of arbitrageurs increases volatility when the inference effect dominates the arbitrage effect. From a technical point of view, the paper offers closed form solutions to a dynamic equilibrium model with asymmetric information and non-Gaussian priors.     

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Modigliani and Miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage‐free. We investigate this invariance theorem in experimental asset markets, finding value‐invariance for assets of identical risks when returns are perfectly correlated. However, exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated, in which case the law of one price is violated. Discrepancies shrink in consecutive markets, but persist even with experienced traders. In markets where overall trader acuity is high, assets trade closer to parity.     

Informed trading and order type

Each trader must choose between a limit order, a market order, or using a floor broker. We hypothesize that informed investors will: (1) concentrate their trading in floor broker orders and (2) sometimes trade patiently. Consistent with our hypotheses, empirical results suggest that most informed trading occurs through orders executed by floor brokers and that informed floor brokers are sometimes patient. Regardless of their patience, however, quote revisions following trade executions are consistent with the hypothesis that markets recognize that floor traders are more likely to be informed than other traders. As a result, informed trading moves equilibrium security values.     

Strategic Trading When Agents Forecast the Forecasts of Others

We analyze a multi-period model of trading with differentially informed traders, liquidity traders, and a market maker. Each informed trader's initial information is a noisy estimate of the long-term value of the asset, and the different signals received by informed traders can have a variety of correlation structures. With this setup, informed traders not only compete with each other for trading profits, they also learn about other traders' signals from the observed order flow. Our work suggests that the initial correlation among the informed traders' signals has a significant effect on the informed traders' profits and the informativeness of prices.