Information Sharing in Financial Markets

Abstract

This paper studies information sharing between strategic investors who are privately informed about asset fundamental with different precision levels. We find that a coarsely informed investor would always share her information “as is” if her counterparty investor is well informed about the fundamental. By doing so, the coarsely informed investor invites the well informed investor to trade against her information, thereby offsetting her informed order flow and reducing the price impact. In equilibrium, the coarsely informed investor gains from the information sharing and the well informed investor loses from it. Our model offers insights for financial phenomena such as information networks in financial markets and institutional investors' trading strategies based on sentiment.

Keywords: Information sharing, communication, sentiment, asset pricing

JEL Classification: D82, G14, G18