Information Sharing in Financial Markets
55 Pages Posted: 14 Jul 2020 Last revised: 24 Jan 2023
Date Written: June 22, 2021
We study information sharing between strategic investors who are informed about asset fundamentals. We demonstrate that a coarsely informed investor optimally chooses to share information if his counterparty investor is well informed. By doing so, the coarsely informed investor invites the other investor to trade against his information, thereby reducing his price impact. Paradoxically, the well informed investor loses from receiving information because of the resulting worsened market liquidity and the more aggressive trading by the coarsely informed investor. Our analysis sheds light on phenomena such as private communications among investors and public information sharing on social media.
Keywords: Information sharing, communication, sentiment, asset pricing
JEL Classification: D82, G14, G18
Suggested Citation: Suggested Citation