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Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate

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  • Ping-Chen Tsai

    (National Sun Yat-sen University)

  • Chi-Ming Tsai

    (Southern Taiwan University of Science and Technology)

Abstract

We study the Glosten–Milgrom model and estimate the proportion of informed traders or speculators using bid–ask spread and price range. The GM model is generalized in terms of a key parameter $$ \theta $$ θ —the probability of making a correct decision by an agent. Informed traders have $$ \theta = 1 $$ θ = 1 , and uninformed traders have $$ \theta = 1/2 $$ θ = 1 / 2 in the GM model. Speculators are defined to be agents with $$ 1/2 1/2 $$ θ ¯ > 1 / 2 using simple trading rules within short trading horizons and net of transaction cost.

Suggested Citation

  • Ping-Chen Tsai & Chi-Ming Tsai, 2021. "Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(3), pages 443-470, July.
    • Handle: RePEc:spr:jeicoo:v:16:y:2021:i:3:d:10.1007_s11403-020-00308-z
    DOI: 10.1007/s11403-020-00308-z
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    2. Domenico Delli Gatti & Tommaso Ferraresi & Filippo Gusella & Lilit Popoyan & Giorgio Ricchiuti & Andrea Roventini, 2024. "The complex interplay between exchange rate and real markets: an agent-based model exploration," LEM Papers Series 2024/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. Domenico Delli Gatti & Tommaso Ferraresi & Filippo Gusella & Lilit Popoyan & Giorgio Ricchiuti & Andrea Roventini, 2024. "The interplay between real and exchange rate market: an agent-based model approach," Working Papers - Economics wp2024_10.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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    More about this item

    Keywords

    Bid–ask spread; Asymmetric information; Speculator; Range; Market microstructure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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