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Strategic Trading When Agents Forecast the Forecasts of Others
Author(s) -
FOSTER F. DOUGLAS,
VISWANATHAN S.
Publication year - 1996
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/j.1540-6261.1996.tb04075.x
Subject(s) - market liquidity , asset (computer security) , order (exchange) , value (mathematics) , business , trading strategy , variety (cybernetics) , financial economics , economics , monetary economics , finance , computer science , computer security , machine learning , artificial intelligence
We analyze a multi‐period model of trading with differentially informed traders, liquidity traders, and a market maker. Each informed trader's initial information is a noisy estimate of the long‐term value of the asset, and the different signals received by informed traders can have a variety of correlation structures. With this setup, informed traders not only compete with each other for trading profits, they also learn about other traders' signals from the observed order flow. Our work suggests that the initial correlation among the informed traders' signals has a significant effect on the informed traders' profits and the informativeness of prices.