Multidimensional noise and non-fundamental information diversity |
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| Affiliation: | 1. School of Economics and Management, Beihang University, Beijing, China;2. Beijing Advanced Innovation Center for Big Data and Brain Computing, BeihangUniversity, Beijing, China;3. Key Laboratory of Complex System Analysis, Management and Decision (BeihangUniversity), Ministry of Education, Beijing, China;1. Guangdong University of Finance and Economics, China;2. Yuan Ze University, Taiwan;3. Newhuadu Business School at Minjiang University, China;4. Research Center for Regional Finance and Innovation, Minjiang University, China;1. School of Economics, Guangxi University, Nanning, Guangxi 530004, China;2. School of Business Administration, South China University of Technology, Guangzhou, Guangdong 510641, China |
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| Abstract: | This paper relaxes the common assumption of the standard competitive noisy rational expectations framework that noise is one-dimensional. Within an environment characterized by multidimensional noise, I explore the strategic interactions between different traders that are informed about different components of the noise inherent in the market price. If noise is two-dimensional, several new types of complementarities in traders’ interactions arise that cannot be studied in the classical one-dimensional framework. The higher-dimensional case uncovers that higher dimensionality of noise mitigates the possibility of a market breakdown by weakening adverse selection. On the basis of the theoretical results, I discuss some predictions and implications concerning the effects of the increased usage of “payment for order flow” in financial markets. |
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| Keywords: | Adverse selection Noise trading Non-fundamental information Payment for order flow |
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