Information Diversity and Complementarities in Trading and Information Acquisition

98 Pages Posted: 16 Aug 2011 Last revised: 26 Feb 2016

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: January 1, 2014

Abstract

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.

Keywords: information diversity, uncertainty reduction effect, price informativeness, complementarity

JEL Classification: G14, G12, G11, D82

Suggested Citation

Goldstein, Itay and Yang, Liyan, Information Diversity and Complementarities in Trading and Information Acquisition (January 1, 2014). Journal of Finance, 2015, 70(4): 1723-1765; Rotman School of Management Working Paper No. 1909501. Available at SSRN: https://ssrn.com/abstract=1909501 or http://dx.doi.org/10.2139/ssrn.1909501

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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