Strategic Trading with Risk Aversion and Information Flow

32 Pages Posted: 21 Mar 2016 Last revised: 24 Feb 2020

See all articles by Ravi Sastry

Ravi Sastry

University of Melbourne - Department of Finance

Rex Thompson

affiliation not provided to SSRN

Date Written: August 19, 2018

Abstract

We analyze a dynamic auction model in which competitive risk-averse traders optimally exploit their long-lived homogeneous private information regarding the value of an asset. The asset's terminal value depends on both the traders’ initial signal and a sequence of zero-mean information shocks — private and/or public — that arrive at each auction. Traders balance the risks of noise trade imbalances, which can be avoided by trading early, and the risks of these persistent shocks, which can be avoided by trading later. Despite competition among the informed traders, observed trade patterns can resemble a “waiting game” rather than a “rat race”.

Keywords: informed trading, risk aversion, price efficiency, information flow, limits to arbitrage

JEL Classification: G14

Suggested Citation

Sastry, Ravi and Thompson, Rex W., Strategic Trading with Risk Aversion and Information Flow (August 19, 2018). Journal of Financial Markets, Vol. 44, 2019, Available at SSRN: https://ssrn.com/abstract=2752315 or http://dx.doi.org/10.2139/ssrn.2752315

Ravi Sastry (Contact Author)

University of Melbourne - Department of Finance ( email )

Level 12
198 Berkeley Street
Victoria 3010
Australia

Rex W. Thompson

affiliation not provided to SSRN

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