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Information Linkages and Correlated Trading

Posted: 25 Jan 2010  

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

Antonio Mele

Swiss Finance Institute & University of Lugano; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase. Moreover, we find that information linkages improve or damage market depth, and lower or boost the Traders' profits, according to whether these linkages convey positively or negatively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by "neighbor" traders are positively correlated and trades generated by "distant" traders are negatively correlated.

Suggested Citation

Colla, Paolo and Mele, Antonio, Information Linkages and Correlated Trading (May 2009). The Review of Financial Studies, Vol. 23, Issue 1, pp. 203-246, 2009. Available at SSRN: https://ssrn.com/abstract=1540996 or http://dx.doi.org/10.1093/rfs/hhp021

Paolo Colla (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Antonio Mele

Swiss Finance Institute & University of Lugano ( email )

Via Buffi, 13
Lugano, 6900
Switzerland

HOME PAGE: http://www.antoniomele.org

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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