A Sequential-trade Microstructure Model with Heterogeneous Information Sets

Authors

Keywords:

market microstructure, sequential trade, bid-ask spread, asymmetric information, information partitions, non-partitional information

Abstract

I present two cases of sequential trade models of market microstructure with heterogeneous information partitions. First, the trader with information can infer the true value only under certain realizations. The main result is that the equilibrium outcomes look quite different from the literature, suggesting that the information assumptions may be a delicate issue to consider in these models. In the second example I adapt a non-partitional information approach from Geanakoplos (1989). When the informed investor does not observe this signal, she does not infer whether the value of the asset is low or high. Here positive spreads may not lead to trade.

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References

Easley, D., & O'Hara, M. (1987). Price, trade size and information in securities markets. Journal of Financial Economics, 19(1), 69–90. https://doi.org/10.1016/0304-405x(87)90029-8

Easley, D., & O'Hara, M. (1992). Time and the process of security price adjustment. Journal of Finance, 47(2), 576–605. https://doi.org/10.1111/j.1540-6261.1992.tb04402.x

Easley, D., Kiefer, N., & O'Hara, M. (1997). One day in the life of a very common stock. Review of Financial Studies, 10(3), 805–835. https://doi.org/10.1093/rfs/10.3.805

Easley, D., & Rustichini, A. (1999). Choice without beliefs. Econometrica, 67(5), 1157–1184.

Foster, D., & Viswanathan, S. (1996). Strategic trading when agents forecast the forecasts of others. The Journal of Finance, 51(4), 1437–1478. https://doi.org/10.1111/j.1540-6261.1996.tb04075.x

Geanakoplos, J. (1989). Game theory without partitions, and applications to speculation and consensus (Discussion Paper N.º 914). Cowles Foundation.

Glosten, L., & Milgrom, P. (1985). Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics, 14(1), 71–100. https://doi.org/10.1016/0304-405x(85)90044-3

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Published

2000-10-31

How to Cite

Kawamura, E. (2000). A Sequential-trade Microstructure Model with Heterogeneous Information Sets. Economic Analysis Review, 15(2), 3–32. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/101

Issue

Vol. 15 No. 2 (2000)

Section

Articles

License

Copyright (c) 2000 Enrique Kawamura

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This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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