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Strategic Trading in a Dynamic Noisy Market
Author(s) -
Vayanos Dimitri
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00321
Subject(s) - endowment , business , stock market , stock (firearms) , financial economics , market share , economics , finance , industrial organization , mechanical engineering , paleontology , philosophy , epistemology , horse , engineering , biology
This paper studies a dynamic model of a financial market with a strategic trader. In each period the strategic trader receives a privately observed endowment in the stock. He trades with competitive market makers to share risk. Noise traders are present in the market. After receiving a stock endowment, the strategic trader is shown to reduce his risk exposure either by selling at a decreasing rate over time or by selling and then buying back some of the shares sold. When the time between trades is small, the strategic trader reveals the information regarding his endowment very quickly.