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Strategic Interaction in a Stock Trading Chat RoomJie LuRutgers, The State University of New Jersey - Rutgers University, New Brunswick/Piscataway Bruce MizrachRutgers University, Department of Economics May 10, 2011 Abstract: We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also establish a symmetric Bayesian Nash equilibrium in which momentum traders pro t from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders bene t from following. We test and con rm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.
Number of Pages in PDF File: 50 Keywords: chat room, strategic information, individual traders, behavioral finance JEL Classification: G14 working papers seriesDate posted: January 24, 2011 ; Last revised: May 12, 2011Suggested CitationContact Information
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