Download or read book Essays on Strategic Trading Asymmetric Information and Asset Pricing written by David John Peterson and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Strategic Trading Asymmetric Information and Asset Pricing written by and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Asymmetric Information and Trading Constraints written by György Venter and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contains three essays exploring the asset pricing implications of asymmetric information and trading constraints. Chapter 1 studies how short-sale constraints affect the informational efficiency of market prices and the link between prices and economic activity. I show that under short-sale constraints security prices contain less information. However, short-sale constraints increase the informativeness of prices to some agents who learn about the quality of an investment opportunity from market prices and have additional private information. This, in turn, can lead to higher allocative efficiency in the real economy. My result thus implies that the decrease in average informativeness due to short-sale constraints can be more than compensated by an increase in informativeness to some agents. In Chapter 2, I develop an equilibrium model of strategic arbitrage under wealth constraints. Arbitrageurs optimally invest into a fundamentally riskless arbitrage opportunity, but if their capital does not fully cover losses, they are forced to close their positions. Strategic arbitrageurs with price impact take this constraint into account and try to induce the fire sales of others by manipulating prices. I show that if traders have similar proportions of their capital invested in the arbitrage opportunity, they behave cooperatively. However, if the proportions are very different, the arbitrageur who is less invested predates on the other. The presence of other traders thus creates predatory risk, and arbitrageurs might be reluctant to take large positions in the arbitrage opportunity in the first place, leading to an initially slow convergence of prices. Chapter 3 (joint with Dömötör Pálvölgyi) studies the uniqueness of equilibrium in a textbook noisy rational expectations economy model a la Grossman and Stiglitz (1980). We provide a very simple proof to show that the unique linear equilibrium of their model is the unique equilibrium when allowing for any continuous price function, linear or not. We also provide an algorithm to create a (non-continuous) equilibrium price that is different from the Grossman-Stiglitz price.

Download or read book Asset Pricing Under Asymmetric Information written by Markus Konrad Brunnermeier and published by Oxford University Press, USA. This book was released on 2001 with total page 264 pages. Available in PDF, EPUB and Kindle. Book excerpt: The role of information is central to the academic debate on finance. This book provides a detailed, current survey of theoretical research into the effect on stock prices of the distribution of information, comparing and contrasting major models. It examines theoretical models that explain bubbles, technical analysis, and herding behavior. It also provides rational explanations for stock market crashes. Analyzing the implications of asymmetries in information is crucial in this area. This book provides a useful survey for graduate students.

Download or read book Asset Pricing under Asymmetric Information written by Markus K. Brunnermeier and published by OUP Oxford. This book was released on 2001-01-25 with total page 262 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset prices are driven by public news and information that is often dispersed among many market participants. These agents try to infer each other's information by analyzing price processes. In the past two decades, theoretical research in financial economics has significantly advanced our understanding of the informational aspects of price processes. This book provides a detailed and up-to-date survey of this important body of literature. The book begins by demonstrating how to model asymmetric information and higher-order knowledge. It then contrasts competitive and strategic equilibrium concepts under asymmetric information. It also illustrates the dependence of information efficiency and allocative efficiency on the security structure and the linkage between both efficiency concepts. No-Trade theorems and market breakdowns due to asymmetric information are then explained, and the existence of bubbles under symmetric and asymmetric information is investigated. The remainder of the survey is devoted to contrasting different market microstructure models that demonstrate how asymmetric information affects asset prices and traders' information , which provide a theoretical explanation for technical analysis and illustrate why some investors "chase the trend." The reader is then introduced to herding models and informational cascades, which can arise in a setting where agents' decision-making is sequential. The insights derived from herding models are used to provide rational explanations for stock market crashes. Models in which all traders are induced to search for the same piece of information are then presented to provide a deeper insight into Keynes' comparison of the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.

Download or read book Essays in Financial Economics written by Luca Gelsomini and published by . This book was released on 2009 with total page 258 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Strategic Thinking and Trading Behaviors written by Hang Zhou and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Strategic thinking pervades human interactions. In a complex world where the consequences are determined by the joint actions of related groups, it is natural and sometimes critical to anticipate the reactions of others and take those into account. The most well-developed theory of strategic interaction is the game theoretical notion of Nash equilibrium. In this model, equilibrium is defined as the collection of strategies such that every player maximizes the expected payoff, given the strategy of others. In addition, the epistemic game theory finds mutual knowledge of rationality to be a necessary condition for Nash equilibrium. However, experimental economics have documented much evidence which challenges Nash equilibrium as the best prediction of strategic interactions. In addition, behavioral game theorists have developed several structural non-equilibrium models that systematically deviate from Nash equilibrium. For instance, the level-k thinking model and the cognitive hierarchy model both assume players adjust their strategies through iterated best responses. Both models introduce levels of sophistication, characterized by the rounds of iterated reasoning, as a predictor of strategic interactions. Experiments suggest that in general, these models outperform Nash equilibrium in terms of predicting the outcome of strategic interactions. My dissertation focuses on understanding the effect of strategic sophistication in market environments. Namely, I study how trading behaviors are determined by participants' levels of reasoning with an emphasis on financial markets. The first chapter of my dissertation investigates the effect of strategic reasoning on financial markets with a level-k thinking framework. A level-k speculator performs k rounds of iterative reasoning to infer information from asset prices. In contrast to the rational expectations equilibrium, the level-k framework produces a unified theory of momentum and contrarian trading strategies. I discuss how the distribution of sophistication levels affects several market variables and sheds new light on empirical patterns such as : (1) overreaction of asset prices, (2) the excess volatility puzzle, and (3) the excessive trading volume puzzle. Moreover, I find the sufficient conditions that thelevel-k strategy converges to the rational expectation equilibrium. The second chapter is joint work with Andr ́es Carvajal. In this paper, we incorporate the insight from level-k literature to a general equilibrium setting of financial markets. We ask the question whether suffcient sophistication on the reasoning of financial traders lead to rational expectations equilibrium and provides an answer. We study a simple exchange economy with complete markets and asymmetric information. Traders are classified as fundamentalists, who know the true probability distributions of random shocks, or speculators, who try to infer the true probabilities from asset prices. We characterize the necessary conditions on convergence to rational expectations equilibrium for some specific utility functions and discuss the general case. Our results are that: (1) convergence to rational expectations requires that speculators have less market impact than fundamentalists; (2) convergence, when it takes place, occurs in an oscillating manner; and (3) asset prices can be more volatile than at rational expectations equilibrium when speculators display low sophistication. The third chapter is joint work with Burkhard Schipper. In this paper, we consider the extension of level-k thinking to extensive-form games. Players may learn about their opponents' levels during the game because some information sets are not consistent with certain levels. In particular, for any information set reached, a level-k player attaches the maximum level-l thinking for l

Download or read book Essays on Asymmetric Information in International Finance written by Aaron Hong Wai Low and published by . This book was released on 1992 with total page 394 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Frictional Financial Markets written by Fabricius Somogyi and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays that uncover the origins of market frictions and their implications for the functioning of the global foreign exchange (FX) market. The first research paper speaks to the hegemony of the US dollar in FX trading. Over 85% of all FX transactions involve the US dollar, despite the United States accounting for less than one quarter of global economic activity. I show both theoretically and empirically that the US dollar dominates FX volumes because FX market participants are strategic about their trading costs. Hence, they avoid directly transacting in non-dollar currency pairs if the expected trading cost is too large. Instead, market participants exchange non-dollar pairs indirectly by using the US dollar as a vehicle currency. That is, market participants first exchange a non-dollar currency into US dollars, and then trade those US dollars for their target currency. I derive a set of theoretical conditions for currency dominance in FX trading volume. To validate these conditions empirically, I use a granular and globally representative FX trade data set. My empirical findings are consistent with the predictions of my theoretical framework and corroborate the importance of strategic behaviour as a novel determinant of currency dominance. Using a novel identification strategy, I show that up to 36-40% of the daily volume in the most liquid dollar currency pairs are due to vehicle currency trading. The second paper studies the information content of trades in the FX market. Specifically, we analyse a novel, comprehensive order flow data set, distinguishing among different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence that global FX order flows convey superior information heterogeneously across agents, time, and currency pairs. These findings are consistent with theories of asymmetric information and over-the-counter market fragmentation. A trading strategy based on exposure to asymmetric information risk generates high returns even after accounting for risk, transaction cost, and other common risk factors shown in the FX literature. Finally, the third paper analyses the cross-sectional asset pricing implications of liquidity risk in the FX market. Precisely because of its sheer size and despite its decentralised nature, the FX market is commonly known as one of the most liquid and resilient trading venues. However, a clear understanding of whether FX liquidity matters for asset prices is still missing. This paper aims to fill this gap by providing the first systematic study of the pricing implications of FX liquidity risk. We show that, even in this market, exposure to liquidity risk commands a non-trivial risk premium of up to 4% percent per annum. In particular, systematic (marketwide) and idiosyncratic liquidity risk are not subsumed by existing FX risk factors and successfully price the cross-section of currency returns. However, we also find that liquidity and carry trade premia are significantly correlated. The carry trade is a simple trading strategy that aims to profit from the interest rate differential between high- and low-yielding currencies. The correlation between liquidity and carry trade premia lends support to a liquidity-based explanation of the infamous carry trade risk premium. To illustrate this point, we decompose carry trade returns and show that the commonality with liquidity risk stems from periods of high market stress and is confined to the static but not the dynamic carry trade.

Download or read book Essays on Asymmetric Information in Financial Markets written by Bradyn Mitchel Breon-Drish and published by . This book was released on 2011 with total page 194 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies the effects of asymmetric information and learning on asset prices and investor decision-making. Two main themes run through the work. The first is the linkage between investor decisions and the information used to make those decisions; that is, portfolio choices reflect the nature and quality of available information. The second theme is the interaction between investor learning and price informativeness. The information held by individual investors is reflected in market prices through their trading decisions, and prices thus transmit this information to other investors. In the first chapter, Asymmetric Information in Financial Markets: Anything Goes, I study a standard Grossman and Stiglitz (1980) noisy rational expectations economy, but relax the usual assumption of the joint normality of asset payoff and supply. The primary contribution is to characterize how the equilibrium relation between price and fundamentals depends on the way in which investors react to the information contained in price. My solution approach dispenses with the typical "conjecture and verify" method, which allows me to analytically solve an entire class of previously intractable nonlinear models that nests the standard model. This simple generalization provides a purely information-based channel for many common phenomena. In particular, price jumps and crashes may arise endogenously, purely due to learning effects, and observation of the net trading volume may be valuable for investors in the economy as it can provide a refinement of the information conveyed by price. Furthermore, the value of acquiring information may be non-monotonic in the number of informed traders, leading to multiple equilibria in the information market. I show also that the relation between investor disagreement and returns is ambiguous and depends on higher moments of the return distribution. In short, many of the standard results from noisy rational expectations models are not robust. I introduce monotone likelihood ratio conditions that determine the signs of the various comparative statics, which represents the first demonstration of the implicit importance of the MLRP in the noisy rational expectations literature. In the second chapter Do Fund Managers Make Informed Asset Allocation Decisions?, a joint work with Jacob S. Sagi, we derive a dynamic model in which mutual fund managers make asset allocation decisions based on private and public information. The model predicts that the portfolio market weights of better informed managers will mean revert faster and be more variable. Conversely, portfolio weights that mean revert faster and are more variable should have better forecasting power for expected returns. We test the model on a large dataset of US mutual fund domestic equity holdings and find evidence consistent with the hypothesis of timing ability, especially at three- to 12-month forecasting horizons. Nevertheless, whatever timing ability may be reflected in portfolio weights does not appear to translate into higher realized returns on funds' portfolios.

Download or read book Three Essays on Strategic Trading in Oligopolistic Economies written by Alexei Boulatov and published by . This book was released on 2004 with total page 328 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Asset Pricing Under Asymmetric Information and Default written by Alexandros P. Vardoulakis and published by . This book was released on 2010 with total page 398 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Information Diffusion and Adverse Selection written by Stephen Robert Rush and published by . This book was released on 2016 with total page 82 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Herding and Strategic Usage of Information in Financial Markets written by Ya Tang and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Asymmetric Information in Asset Trading Models written by Ian Lindsay Gale and published by . This book was released on 1986 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Asymmetric Information written by Shino Takayama and published by . This book was released on 2006 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Information and Markets written by Bobak Moallemi and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is a collection of three empirical studies broadly concerning how information flows and how markets function. The first chapter looks at informed trading in a financial market where asset prices are set in advance and not adjusted for investor demand. I focus on a novel setting, online marketplaces for unsecured consumer debt. Here, a single platform serves as both financial intermediary and market-maker, vetting borrowers and setting prices (interest rates). The platform randomly assigns the loans between two markets, one retail- and one institution-facing, where they are subsequently sold. In both markets, the price is fixed before trading starts and does not fluctuate once investor demand is realized. In both markets, I find strong evidence that there exist sophisticated investors who freely and aggressively purchase underpriced loans given that they face no price impact. This creates a significant adverse selection problem for the comparatively unsophisticated investors in each market. I find that the cost to unsophisticated investors is on the order of several hundred basis points in returns per loan. I then demonstrate that investment decisions--proxied by observable order flow--are an informative signal of agents' private valuations. I show that unsophisticated investors infer private information and mitigate their exposure to adverse selection. Finally, I offer evidence that the platform itself uses observed order flow to identify gross pricing errors or outright borrower fraud and, based on this, cancel loans ahead of origination. The findings suggest that this broad form of information discovery helps sustain investor participation in these markets, despite the potential for adverse selection. The second chapter, coauthored with Ryan Shyu and Ramana Ramakrishnan, considers the informational frictions pervading labor markets. We specifically ask how firms' learn from other firms' human resource allocation decisions. We concentrate on job promotions which, according to theory, serves as an informative signal to outside employers if there is asymmetric information about worker ability. Using variation in the timing of promotion reports on LinkedIn CVs, we implement a differences-in-differences strategy to demonstrate that online promotion reports increase recruiter-initiated worker contacts ("InMails"). The signaling impact of promotions is concentrated among those who have recently attracted previous recruiter interest; this effect is subsumed by firm and job heterogeneity, suggesting that factors idiosyncratic to individual users are less important relative to firm and job quality in providing labor market visibility. The third chapter, coauthored with my advisor, Peter Koudijs, examines the market for margin loans in Amsterdam between 1762 and 1775 to establish a causal relation between leverage and the level of asset prices. Margin loan contracts typically ran for 24 months and had margin calls and margin returns built in. After a margin call, a borrower was forced to delever; after a margin return a borrower could lever up. Margin calls and margin returns were activated at critical price levels that were typically a multiple of 10. We document that price changes crossing a multiple of 10 were larger than price changes crossing any other integer, to the tune of 50--150 bps, suggesting that changes in leverage causally affected asset prices. These price changes persisted for at least 3 months. We also provide evidence suggesting that margin returns allowed the most optimistic agents to lever up, allowing them to purchase more shares and drive up the price.