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Strategic trading and unobservable information acquisition

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  • Banerjee, Snehal
  • Breon-Drish, Bradyn

Abstract

We allow a strategic trader to choose when to acquire information about an asset’s payoff, instead of endowing her with it. When the trader dynamically controls the precision of a flow of information, the optimal precision evolves stochastically and increases with market liquidity. Because the trader exploits her information gradually, the equilibrium price impact and market uncertainty are unaffected by her rate of acquisition. If she pays a fixed cost to acquire “lumpy” information at a time of her choosing, the market can break down: we show that no equilibria exist with endogenous information acquisition. Our analysis suggests caution when applying insights from standard strategic trading models to settings with information acquisition.

Suggested Citation

  • Banerjee, Snehal & Breon-Drish, Bradyn, 2020. "Strategic trading and unobservable information acquisition," Journal of Financial Economics, Elsevier, vol. 138(2), pages 458-482.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:2:p:458-482
    DOI: 10.1016/j.jfineco.2020.05.007
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    References listed on IDEAS

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    Cited by:

    1. Zongxia Liang & Qi Ye, 2024. "Optimal information acquisition for eliminating estimation risk," Papers 2405.09339, arXiv.org.
    2. Haghighi, Afshin & Zhang, Lei & Oliver, Barry & Faff, Robert, 2023. "Information acquisition and market liquidity: Evidence from EDGAR search activity," Global Finance Journal, Elsevier, vol. 57(C).
    3. Sebastian Jaimungal & Xiaofei Shi, 2024. "The Price of Information," Papers 2402.11864, arXiv.org, revised Mar 2024.
    4. Han, Jinhui & Li, Xiaolong & Ma, Guiyuan & Kennedy, Adrian Patrick, 2023. "Strategic trading with information acquisition and long-memory stochastic liquidity," European Journal of Operational Research, Elsevier, vol. 308(1), pages 480-495.
    5. Jaime Alberto Gómez Vilchis & Federico Hernández Álvarez & Luis Ignacio Román de la Sancha, 2021. "Autómata Evolutivo (AE) para el mercado accionario usando Martingalas y un Algoritmo Genético," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-22, Octubre -.
    6. Fardeau, Vincent, 2023. "Sequential entry in illiquid markets," Journal of Financial Markets, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Dynamic information acquisition; Strategic trading; Observability; Commitment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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