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The negative value of private information in illiquid markets

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  • Nezafat, Mahdi
  • Schroder, Mark

Abstract

In the standard perfectly competitive rational expectations model of information acquisition, the marginal benefit of private information to each trader is always positive. We show that with imperfect competition, characterized by a finite number of traders, the value of private information can be negative, resulting in a zero-information equilibrium even if information is free. This zero-information equilibrium arises when noise-trading volume is sufficiently large that price informativeness is weak, and when noise traders are sufficiently bullish or bearish. Given the evidence suggesting that retail traders behave as noise traders, our findings suggest that retail traders can play a significant role in investors' information-acquisition decisions in financial markets.

Suggested Citation

  • Nezafat, Mahdi & Schroder, Mark, 2023. "The negative value of private information in illiquid markets," Journal of Economic Theory, Elsevier, vol. 210(C).
    • Handle: RePEc:eee:jetheo:v:210:y:2023:i:c:s0022053123000601
    DOI: 10.1016/j.jet.2023.105664
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    References listed on IDEAS

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    Cited by:

    1. Michail Anthropelos & Scott Robertson, 2024. "Strategic Informed Trading and the Value of Private Information," Papers 2404.08757, arXiv.org.

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    More about this item

    Keywords

    Imperfect competition; Rational expectations; Information acquisition; Retail traders; Retail investor sentiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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