IDEAS home Printed from https://ideas.repec.org/p/uwo/uwowop/20191.html
   My bibliography  Save this paper

Trading Motives in Asset Markets

Author

Abstract

I study how trading motives in asset markets affect equilibrium outcomes and welfare. I focus on two types of trading motives – informational and allocational. I show that while a fully separating equilibrium is the unique equilibrium when trading motives are known, multiple equilibria exist when trading motives are unknown. Moreover, forcing traders to reveal their trading motives may harm welfare. I also use this model to study how an asset market may exit a fire sale equilibrium and how government programs may eliminate private information and improve agents’ welfare.

Suggested Citation

  • Zijian Wang, 2019. "Trading Motives in Asset Markets," University of Western Ontario, Departmental Research Report Series 20191, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:20191
    as

    Download full text from publisher

    File URL: https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1827&context=economicsresrpt
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andolfatto, David & Berentsen, Aleksander & Waller, Christopher, 2014. "Optimal disclosure policy and undue diligence," Journal of Economic Theory, Elsevier, vol. 149(C), pages 128-152.
    2. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
    3. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
    4. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(4), pages 915-944.
    5. Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, American Economic Association, vol. 107(4), pages 1005-1029, April.
    6. Veronica Guerrieri & Robert Shimer, 2018. "Markets with Multidimensional Private Information," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 250-274, May.
    7. Briana Chang, 2018. "Adverse Selection and Liquidity Distortion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 275-306.
    8. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
    9. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    10. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    11. Dimitri Vayanos, 2001. "Strategic Trading in a Dynamic Noisy Market," Journal of Finance, American Finance Association, vol. 56(1), pages 131-171, February.
    12. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    13. Guillaume Rocheteau, 2008. "Money and competing assets under private information," Working Papers (Old Series) 0802, Federal Reserve Bank of Cleveland.
    14. Madison, Florian, 2019. "Frictional asset reallocation under adverse selection," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 115-130.
    15. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    16. Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Athanasios Geromichalos & Kuk Mo Jung & Seungduck Lee & Dillon Carlos, 2019. "Asset Liquidity in Monetary Theory and Finance: A Unified Approach," Working Papers 1905, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James B. Davies & Samantha L. Black, 2020. "Distributional Effects of Flooding, with an Application to a Major Urban Area," University of Western Ontario, Departmental Research Report Series 20201, University of Western Ontario, Department of Economics.
    2. Wang, Zijian, 2019. "Trading Motives in Asset Markets," MPRA Paper 91401, University Library of Munich, Germany.
    3. Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
    5. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    6. Madison, Florian, 2024. "Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset sale," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    7. Madison, Florian, 2019. "Frictional asset reallocation under adverse selection," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 115-130.
    8. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).
    9. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Papers (Old Series) 0901, Federal Reserve Bank of Cleveland.
    10. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    11. Wang, Chenxi, 2023. "A model of international currency with private information," Journal of International Money and Finance, Elsevier, vol. 131(C).
    12. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    13. Guillaume Rocheteau, 2008. "Money and competing assets under private information," 2008 Meeting Papers 525, Society for Economic Dynamics.
    14. Emre Ozdenoren & Kathy Yuan & Shengxing Zhang, 2023. "Dynamic Asset-Backed Security Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(6), pages 3282-3314.
    15. Vincent Maurin, 2022. "Liquidity Fluctuations in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 77(2), pages 1325-1369, April.
    16. Choi, Michael, 2018. "Imperfect information transmission and adverse selection in asset markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 619-649.
    17. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    18. Mehmet Ekmekci & Nenad Kos, 2020. "Signaling Covertly Acquired Information," Working Papers 658, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    19. Ekmekci, Mehmet & Kos, Nenad, 2023. "Signaling covertly acquired information," Journal of Economic Theory, Elsevier, vol. 214(C).
    20. Seyed Mohammadreza Davoodalhosseini, 2020. "Adverse Selection With Heterogeneously Informed Agents," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1307-1358, August.

    More about this item

    Keywords

    asset markets; private information; competitive search; government intervention;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uwo:uwowop:20191. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://economics.uwo.ca/research/research_papers/department_working_papers.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.