Information Percolation in Segmented Markets

Abstract

We calculate equilibria of dynamic double-auction markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors are segmented into groups that differ with respect to characteristics determining information quality, including initial information precision as well as market "connectivity," the expected frequency of their trading opportunities. Investors with superior information sources attain strictly higher expected profits, provided their counterparties are unable to observe the quality of those sources. If, however, the quality of bidders' information sources are commonly observable, then, under conditions, investors with superior information sources have strictly lower expected profits.

Trading networks

“…Overall, we reject the null hypothesis of random trading patterns in transactions among market participants and we support trading models motivated by information flows (Babus and Kondor, 2016), information percolation (Duffie et al, 2015) and trading strategies (Kyle et al, 2016), which predict persistent trading patterns. To highlight this dynamic, we simulate an agent-based trading model, which replicates the contemporaneous correlations between financial and network variables, but exhibits no Granger-causality.…”

“…Trading networks S127 information percolation/market connectivity (Duffie et al, 2015). 2 Each of these works serves to motivate an empirical examination of financial markets through the lens of network technology.…”

Reprint of: Information percolation in segmented markets

“…Appendices D through L are found in an online supplement, Duffie, Malamud, and Manso [16]. Appendices D through L are found in an online supplement, Duffie, Malamud, and Manso [16].…”

“…In other social learning settings, previous research has found that public information releases may crowd out learning (e. g. Appendices D through L are located in an online supplement, Duffie, Malamud, and Manso [16]. Table 1 Directory of locations of proofs of main results.…”

“…(16) It follows directly from (20) and (21) below that if F H and F L correspond to the conditional type distributions associated with a single fixed signal, then they are amenable. (16) It follows directly from (20) and (21) below that if F H and F L correspond to the conditional type distributions associated with a single fixed signal, then they are amenable.…”