Strategic Trading with Endogenous Fundamental and Non-Fundamental Information Acquisition

Download or read book Strategic Trading with Endogenous Fundamental and Non-Fundamental Information Acquisition written by Maximilien Demarquette and published by . This book was released on 2016 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study information acquisition in a strategic setting where traders can produce either fundamental information or non-fundamental information. Fundamental information is related to the traded asset value. Non-fundamental information is related to noise trading (transitory random demand). Opening access to non-fundamental information reduces the equilibrium number of fundamental traders, therefore price informativeness and eventually the welfare of noise traders. Hence, favoring nonfundamental trading might be detrimental. Then, we assume that non-fundamental traders observe in addition the forthcoming aggregate demand from fundamental and noise traders. In this setting, non-fundamental information allows both to correct short-term mispricing and to draw back fundamental information from the order flow. Opening access to non-fundamental information still reduces price informativeness and eventually the welfare of noise traders, even when non-fundamental information is perfect. Moreover, in the latter case, there are two equilibria: a good (bad) equilibrium with many (few) fundamental traders and few (many) non-fundamental ones.