Information Linkages and Correlated Trading
Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Bocconi University - BAFFI - Paolo Baffi Centre on Central Banking and Financial Regulation
Swiss Finance Institute & University of Lugano
February 2, 2007
AFA 2008 New Orleans Meetings Paper
In a market with informationally connected traders, the dynamics of volume, price informativeness, price-volatility, and price-impacts are severely affected by the number of information linkages every trader experiences with his neighbors. We show that in the presence of information linkages among traders, volume and price informativeness increase and price-impacts lower. Moreover, we find that information linkages boost or damage the traders' profitability according to whether such linkages convey negatively or positively correlated signals. Finally, our model predicts patterns of trades correlation consistent with patterns of trades correlation identified in the empirical literature: 'neighbor' trades are positively correlated and 'distant' trades are negatively correlated.
Number of Pages in PDF File: 53
Keywords: market microstructure, information linkages
JEL Classification: D82, D83, D84, G12, G14working papers series
Date posted: March 12, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.531 seconds