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Information linkages in a financial market with imperfect competition

Author

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  • Lou, Youcheng
  • Yang, Yaqing

Abstract

This study proposes a tractable imperfectly competitive economy where traders are socially connected with each other via an information network. We investigate the impact of information linkages on market equilibrium outcomes. In the linear-quadratic-normal framework, we first establish the existence and uniqueness of symmetric linear Bayesian Nash equilibrium. We then show that an increase of the level of information linkages decreases price impact, belief disagreement, return volatility and trading volume. Additionally, unlike the non-monotonicity results in large economies, we also show that increasing the level of information linkages always improves liquidity, increases price volatility, and decreases trading profits in our imperfectly competitive economy.

Suggested Citation

  • Lou, Youcheng & Yang, Yaqing, 2023. "Information linkages in a financial market with imperfect competition," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:dyncon:v:150:y:2023:i:c:s0165188923000490
    DOI: 10.1016/j.jedc.2023.104643
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Information linkages; Imperfect competition; Market Equilibrium Outcomes;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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