Strategic Trading in Informationally Complex Environments

40 Pages Posted: 22 Sep 2014 Last revised: 24 Jul 2021

See all articles by Nicolas S. Lambert

Nicolas S. Lambert

Stanford Graduate School of Business - Knight Management Center

Michael Ostrovsky

Stanford Graduate School of Business

Mikhail Panov

ISEDT RAS

Date Written: September 2014

Abstract

We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of Kyle (1985). We allow for essentially arbitrary correlations among the random variables involved in the model: the value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.

Suggested Citation

Lambert, Nicolas S. and Ostrovsky, Michael and Panov, Mikhail, Strategic Trading in Informationally Complex Environments (September 2014). NBER Working Paper No. w20516, Available at SSRN: https://ssrn.com/abstract=2499378

Nicolas S. Lambert (Contact Author)

Stanford Graduate School of Business - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Michael Ostrovsky

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States
650-724-7280 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/ostrovsky/

Mikhail Panov

ISEDT RAS ( email )

Vologda, Vologodskaya 160014
Russia

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