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Strategic trading with risk aversion and information flow

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  • Sastry, Ravi
  • Thompson, Rex

Abstract

We analyze a dynamic auction model in which competitive risk-averse traders optimally exploit their long-lived homogeneous private information regarding the value of an asset. The asset's terminal value depends on both the traders' initial signal and a sequence of zero-mean information shocks — private and/or public — that arrive at each auction. Traders balance the risks of noise trade imbalances, which can be avoided by trading early, and the risks of these persistent shocks, which can be avoided by trading later. Despite competition among the informed traders, observed trade patterns can resemble a “waiting game” rather than a “rat race.”

Suggested Citation

  • Sastry, Ravi & Thompson, Rex, 2019. "Strategic trading with risk aversion and information flow," Journal of Financial Markets, Elsevier, vol. 44(C), pages 1-16.
    • Handle: RePEc:eee:finmar:v:44:y:2019:i:c:p:1-16
    DOI: 10.1016/j.finmar.2018.12.004
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    References listed on IDEAS

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    Cited by:

    1. Crego, Julio A., 2020. "Why does public news augment information asymmetries?," Journal of Financial Economics, Elsevier, vol. 137(1), pages 72-89.

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    More about this item

    Keywords

    Informed trading; Risk aversion; Price efficiency; Information flow; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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