Abstract
We model a stock market with multiple stocks in a dynamic setting. Multiple informed traders receive new and heterogeneous information about the stocks in each period and use this information strategically. We characterize the decay rate of the information as it is incorporated into prices. The presence of multiple assets speeds information release by providing more channels for market makers to acquire information and incorporate that information in prices. The result is not only that profits are reduced in multi-asset settings, but that information release tilts toward new information relative to old information, reducing the profits that can be acquired by privately informed traders.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Admati, A.: A noisy rational expectations equilibrium for multi-asset securities markets. Econometrica 53, 629–658 (1985)
Admati, A., Pfleiderer, P.: A theory of intraday patterns: volume and price variability. Rev. Finance Stud. 1, 3–40 (1998)
Back, K., Baruch, S.: Information in securities markets: Kyle meets Glosten and Milgrom. Econometrica 72, 433–465 (2004)
Back, K., Baruch, S.: Working orders in limit order markets and floor exchanges. J. Finance (2007, forthcoming), http://www.afajof.org/afa/forthcoming/Back.pdf
Back, K., Pedersen, H.: Long-lived information and intraday patterns. J. Finance Mark. 1, 385–402 (1998)
Back, K., Cao, H., Willard, G.: Imperfect competition among informed traders. J. Finance 55, 2117–2155 (2000)
Ball, J., Taub, B.: Factoring spectral matrices in linear-quadratic models. Econ. Lett. 35, 39–44 (1991)
Ball, J., Gohberg, I., Rodman, L.: Interpolation of Rational Matrix Functions. Birkhäuser, Basel (1990)
Bernhardt, D., Miao, J.: Informed trading when information becomes stale. J. Finance 59, 339–390 (2004)
Bernhardt, D., Taub, B.: Kyle versus Kyle (’85 versus ’89). Ann. Finance 2, 23–38 (2006)
Bernhardt, D., Taub, B.: Cross-asset speculation in stock markets. Working Paper, University of Illinois (2006), http://www.econ.uiuc.edu/~bart/cladistic/cross-asset_speculation.pdf
Bernhardt, D., Seiler, P., Taub, B.: Speculative dynamics. Working Paper, University of Illinois (2005), http://www.econ.uiuc.edu/~bart/cladistic/speculative_dynamics.pdf
Boulatov, A., Livdan, D.: Strategic trading with market closures. Working Paper, University of Houston (2006), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=870608
Brock, W.A., Durlauf, S., Rondina, G.: Design limits and optimal policy analysis. Working Paper, University of Wisconsin (2006), http://www.ssc.wisc.edu/~grondina/bdr5-25-06/g.pdf
Caballe, J., Krishnan, M.: Imperfect competition in a multi-security market with risk neutrality. Econometrica 62, 695–704 (1994)
Conway, J.B.: A Course in Functional Analysis. Springer, New York (1985)
Davenport, W.B. Jr., Root, W.L.: An Introduction to the Theory of Random Signals and Noise. McGraw-Hill, New York (1958)
Foster, D., Viswanathan, S.: Strategic trading when agents forecast the forecasts of others. J. Finance 51, 1437–1478 (1996)
Futia, C.: Rational expectations in stationary linear models. Econometrica 49, 171–192 (1982)
Glosten, L., Milgrom, P.: Bid, ask and transaction prices in a specialist market with heterogeneously-informed traders. J. Finance Econ. 13, 71–100 (1985)
Hansen, L., Sargent, T.: Formulating and estimating dynamic linear rational expectations models. J. Econ. Dyn. Control 2, 7–46 (1980)
Hansen, L., Sargent, T.: Linear rational expectations models for dynamically interrelated variables. In: Lucas, R.E., Sargent, T. (eds.) Rational Expectations and Econometric Practice, vol. 1, pp. 127–158. University of Minnesota Press, Minneapolis (1981)
Hoffman, K.: Banach Spaces of Analytic Functions. Prentice-Hall, Englewood Cliffs (1962)
Holden, C.W., Subrahmanyam, A.: Long-lived private information and imperfect competition. J. Finance 47, 247–270 (1992)
Iakoubovski, M., Merino, O.: Calculating spectral factors of low and full rank matrix-valued functions on the unit circle. In: Proceedings of the 38th IEEE Conference on Decision and Control, vol. 1, pp. 505–506 (1999)
Kailath, T., Sayed, A., Hassibi, B.: Linear Estimation. Prentice-Hall, Upper Saddle River (2000)
Kasa, K.: Forecasting the forecasts of others in the frequency domain. Rev. Econ. Dyn. 3, 726–756 (2000)
Kasa, K., Walker, T., Whiteman, C.: Asset prices in a time series model with perpetually disparately informed, competitive traders. Working Paper, Simon Fraser University (2007), http://www.sfu.ca/~kkasa/KWW_4_28_07.PDF
Kyle, A.: Continuous auctions and insider trading. Econometrica 53, 1315–1335 (1985)
Kyle, A.: Informed speculation and monopolistic competition. Rev. Econ. Stud. 56, 317–355 (1989)
Rozanov, Y.A.: Stationary Random Processes. Holden-Day, San Francisco (1967)
Rudin, W.: Real and Complex Analysis. McGraw-Hill, New York (1974)
Taub, B.: The equivalence of lending equilibria and signalling-based insurance under asymmetric information. Rand J. Econ. 21, 388–408 (1990)
Townsend, R.: Forecasting the forecasts of others. J. Polit. Econ. 91, 546–588 (1985)
Vayanos, D.: Strategic trading in a dynamic noisy market. J. Finance 56, 131–171 (2001)
Whiteman, C.: Spectral utility, Wiener–Hopf techniques, and rational expectations. J. Econ. Dyn. Control 9, 225–240 (1985)
Author information
Authors and Affiliations
Corresponding author
Electronic Supplementary Material
Rights and permissions
About this article
Cite this article
Seiler, P., Taub, B. The dynamics of strategic information flows in stock markets. Finance Stoch 12, 43–82 (2008). https://doi.org/10.1007/s00780-007-0046-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00780-007-0046-4