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Heterogeneous noisy beliefs and dynamic competition in financial markets

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  • Boco, Hervé
  • Germain, Laurent
  • Rousseau, Fabrice

Abstract

This paper analyzes the competition of heterogeneously informed traders in a multi-auction setting. We obtain that the competition can take different forms depending on the number of traders, trading rounds and the noise in the information. When the number of traders is small and the number of trading rounds is large, traders may trade very aggressively at the opening and at the end of the trading day with lower trading intensity in between. Hence, we can explain volume patterns by the nature of the competition between traders rather than by pattern in the level of liquidity. We find that the noise in the signal may be beneficial for traders when the competition is strong as it gives them a monopolistic position on their private information. The amount of noise maximizing the trader's expected profit increases with the number of trading rounds as well as the number of traders. This implies that the value of information is closely related to the market where that information is subsequently being used.

Suggested Citation

  • Boco, Hervé & Germain, Laurent & Rousseau, Fabrice, 2016. "Heterogeneous noisy beliefs and dynamic competition in financial markets," Economic Modelling, Elsevier, vol. 54(C), pages 347-363.
    • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:347-363
    DOI: 10.1016/j.econmod.2016.01.007
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    Cited by:

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    2. Fabrice Rousseau & Herve Boco & Laurent Germain, 2020. "High Frequency Trading: Strategic Competition Between Slow and Fast Traders," Economics Department Working Paper Series n296-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    3. Piccotti, Louis R., 2020. "Strategic trade when securitized portfolio values are unknown," Journal of Banking & Finance, Elsevier, vol. 115(C).

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