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Communication Dilemma in Speculative Markets

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  • Nevzat Eren
  • Han N. Ozsoylev

Abstract

We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.

Suggested Citation

  • Nevzat Eren & Han N. Ozsoylev, 2006. "Communication Dilemma in Speculative Markets," OFRC Working Papers Series 2006fe08, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2006fe08
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2006fe08.pdf
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    Cited by:

    1. Frederik König, 2014. "Reciprocal social influence on investment decisions: behavioral evidence from a group of mutual fund managers," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(3), pages 233-262, August.

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