Strategic Trading When Agents Forecast the Forecasts of Others

J. OF FINANCE, Vol. 51 No. 4, September 1996

Posted: 20 Nov 1996

See all articles by F. Douglas Foster

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Abstract

We analyze a multi-period model of trading with differentially informed traders, liquidity traders and a market maker. Each informed traders' initial information is a noisy estimate of the long-term value of the asset, and the different signals received by informed traders can have a variety of correlation structures. With this setup informed traders not only compete with each other for trading profits, they also learn about other traders' signals from the observed order flow. Our work suggests that the initial correlation among the informed traders' signals has a significant effect on the informed traders' profits and the informativeness of prices.

JEL Classification: G12, G19

Suggested Citation

Foster, F. Douglas and Viswanathan, S., Strategic Trading When Agents Forecast the Forecasts of Others. J. OF FINANCE, Vol. 51 No. 4, September 1996. Available at SSRN: https://ssrn.com/abstract=7915

F. Douglas Foster

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

S. Viswanathan (Contact Author)

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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