Information Diversity and Complementarities in Trading and Information Acquisition
University of Pennsylvania - The Wharton School - Finance Department
University of Toronto - Rotman School of Management
January 1, 2014
Journal of Finance, Forthcoming
Rotman School of Management Working Paper No. 1909501
We analyze a model where different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: The aggressive trading on information about one fundamental reduces the uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications.
Number of Pages in PDF File: 98
Keywords: information diversity, uncertainty reduction effect, price informativeness, complementarity
JEL Classification: G14, G12, G11, D82
Date posted: August 16, 2011 ; Last revised: March 13, 2014
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