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Strategic trading and welfare in a dynamic market

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  • Vayanos, Dimitri

Abstract

This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behavior increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order 1/N, and not 1/N² as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.

Suggested Citation

  • Vayanos, Dimitri, 1999. "Strategic trading and welfare in a dynamic market," LSE Research Online Documents on Economics 449, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:449
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    More about this item

    Keywords

    JEL classification codes : C73; D44; G11;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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