Illiquidity and the Value of Private Information

57 Pages Posted: 17 Jan 2016 Last revised: 15 Feb 2020

See all articles by Pedram Nezafat

Pedram Nezafat

Michigan State University

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management

Date Written: February 14, 2020

Abstract

We show two surprising consequences of introducing endogenous information acquisition into an imperfectly competitive trading model characterized by a small number of traders. First, the marginal value of private information can be negative, resulting in an equilibrium with no private-information acquisition. Second, imperfect competition typically generates information complementarity. We characterize the roles that liquidity traders play in these findings and demonstrate that several polices to improve price efficiency and market liquidity fall short in achieving the intended goals.

Keywords: \Imperfect competition, information production, excess volatility, information complementarity, adverse selection, exchange traded funds (ETFs)

JEL Classification: G11

Suggested Citation

Nezafat, Pedram and Schroder, Mark D., Illiquidity and the Value of Private Information (February 14, 2020). Available at SSRN: https://ssrn.com/abstract=2716348 or http://dx.doi.org/10.2139/ssrn.2716348

Pedram Nezafat (Contact Author)

Michigan State University ( email )

MI
United States

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management ( email )

323 Eppley Center
East Lansing, MI 48824-1121
United States
517-432-0622 (Phone)
517-432-1080 (Fax)

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