Information Spillovers in Asset Markets with Correlated Values†

Information Spillovers in Asset Markets with Correlated Values† AbstractWe study information spillovers in a dynamic setting with correlated assets owned by privately informed sellers. In the model, a trade of one asset can provide information about the value of other assets. Importantly, the information content of trading behavior is endogenously determined. We show that this endogeneity leads to multiple equilibria when assets are sufficiently correlated. The equilibria are ranked in terms of both trade volume and efficiency. The model has implications for policies targeting post-trade transparency. We show that introducing post-trade transparency can increase or decrease welfare and trading volume depending on the asset correlation, equilibrium being played, and the composition of market participants. (JEL D82, D83, G14, G18) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Information Spillovers in Asset Markets with Correlated Values†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
0002-8282
D.O.I.
10.1257/aer.20151714
Publisher site
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Abstract

AbstractWe study information spillovers in a dynamic setting with correlated assets owned by privately informed sellers. In the model, a trade of one asset can provide information about the value of other assets. Importantly, the information content of trading behavior is endogenously determined. We show that this endogeneity leads to multiple equilibria when assets are sufficiently correlated. The equilibria are ranked in terms of both trade volume and efficiency. The model has implications for policies targeting post-trade transparency. We show that introducing post-trade transparency can increase or decrease welfare and trading volume depending on the asset correlation, equilibrium being played, and the composition of market participants. (JEL D82, D83, G14, G18)

Journal

American Economic ReviewAmerican Economic Association

Published: Jul 1, 2017

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