Public Communication Devices in Financial Markets
Author | : Tilman Klumpp |
Publisher | : |
Total Pages | : 27 |
Release | : 2005 |
ISBN-10 | : OCLC:1290347429 |
ISBN-13 | : |
Rating | : 4/5 (29 Downloads) |
Book excerpt: This paper studies the role of public communication devices for information aggregation in financial markets. The paper investigates the incentives for informed traders to reveal their information truthfully to the public. In the model, a subset of traders receives noisy signals about the value of a risky asset. Between trading periods, these agents post messages on a public communication device. Uninformed traders, called the public, read these messages. In addition, noise traders are present to facilitate trade. Informative (i.e. fully revealing) equilibria exist if the number of informed traders is sufficiently large and the number of noise traders is sufficiently small. The reason is that informed traders are informationally small enough to refrain from market manipulation and trade on their private signals only. After these initial trades, they announce their signals truthfully in an effort to push the market price in a direction that supports the initial trades.