Strategic Trading, Liquidity and Information Acquisition

Posted: 26 May 2003

See all articles by Haim Mendelson

Haim Mendelson

Stanford University - Stanford Graduate School of Business

Tunay I. Tunca

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

We study endogenous liquidity trading in a market with long-lived asymmetric information. We distinguish between public information, tractable information that can be acquired and intractable information that cannot be acquired. Besides information asymmetry and noise, the adverse-selection spread depends on the diffusion of intractable information and on the interest rate. With endogenous liquidity trading, efficiency is lower than that implied by noise-trading models. Liquidity traders benefit from the information released through the insider's trades in spite of their monetary losses. We study factors that affect the insider's information acquisition decision, including the amount of intractable information, observability and information acquisition costs.

JEL Classification: M41, G10, D82

Suggested Citation

Mendelson, Haim and Tunca, Tunay I., Strategic Trading, Liquidity and Information Acquisition. The Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=407220

Haim Mendelson

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-8927 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://faculty-gsb.stanford.edu/mendelson/

Tunay I. Tunca (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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