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Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

Author

Listed:
  • Jie Lu

    (Rutgers University)

  • Bruce Mizrach

    (Rutgers University)

Abstract

We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.

Suggested Citation

  • Jie Lu & Bruce Mizrach, 2007. "Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room," Departmental Working Papers 200701, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:200701
    as

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    References listed on IDEAS

    as
    1. Nicolosi, Gina & Peng, Liang & Zhu, Ning, 2009. "Do individual investors learn from their trading experience?," Journal of Financial Markets, Elsevier, vol. 12(2), pages 317-336, May.
    2. repec:bla:jfinan:v:59:y:2004:i:3:p:1259-1294 is not listed on IDEAS
    3. Bruce Mizrach, 2003. "Analyst Recommendations and Nasdaq Market Making Activity," Departmental Working Papers 200307, Rutgers University, Department of Economics.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    chat room; strategic information;

    JEL classification:

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

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