Information Chasing versus Adverse Selection

57 Pages Posted: 9 Sep 2020 Last revised: 12 Aug 2021

See all articles by Gabor Pinter

Gabor Pinter

Bank of England

Chaojun Wang

University of Pennsylvania - The Wharton School

Junyuan Zou

INSEAD

Date Written: July 28, 2020

Abstract

Contrary to the prediction of the classic adverse selection theory, more informed traders could receive better pricing relative to less informed traders in over-the-counter financial markets. Dealers actively chase informed orders to better position their future quotes and avoid winner's curse in subsequent trades. On a multi-dealer platform, dealers' incentive of information chasing exactly offsets their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market.

Keywords: Information Chasing, Adverse Selection, Over-the-Counter, Multi-Dealer Platform, Winner’s Curse, Pre-Trade and Post-Trade Transparency, Price Efficiency, Price Dispersion, Information Concentration

JEL Classification: G14, G18, D82

Suggested Citation

Pinter, Gabor and Wang, Chaojun and Zou, Junyuan, Information Chasing versus Adverse Selection (July 28, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3662566 or http://dx.doi.org/10.2139/ssrn.3662566

Gabor Pinter

Bank of England ( email )

Chaojun Wang (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Junyuan Zou

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
75
Abstract Views
1,254
rank
403,990
PlumX Metrics