Information Spillovers in Asset Markets with Correlated Values
36 Pages Posted: 18 Feb 2015 Last revised: 3 May 2017
Date Written: May 1, 2017
We study information spillovers in a dynamic setting with correlated assets owned by privately-informed sellers. In the model, a trade of one asset can provide information about the value of other assets. Importantly, the information content of trading behavior is endogenously determined. We show that this endogeneity leads to multiple equilibria when assets are sufficiently correlated. The equilibria are ranked in terms of both trade volume and efficiency. The model has implications for policies targeting post-trade transparency. We show that introducing post-trade transparency can increase or decrease welfare and trading volume depending on the asset correlation, equilibrium being played, and the composition of market participants.
Keywords: Information Spillovers, Transparency, Adverse Selection, Information Aggregation
JEL Classification: D82, G14, C73
Suggested Citation: Suggested Citation