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Journal Article

Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information

F. Douglas Foster and S. Viswanathan
The Journal of Financial and Quantitative Analysis
Vol. 29, No. 4 (Dec., 1994), pp. 499-518
DOI: 10.2307/2331107
Stable URL: http://www.jstor.org/stable/2331107
Page Count: 20
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Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information
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Abstract

A dynamic model of strategic trading with two asymmetrically informed traders is analyzed where one informed trader knows the information seen by both informed traders, and the other informed trader only knows his private information. While the first informed trader is better informed, the second informed trader can make inferences about this extra information; in fact, the second informed trader can make sharper inferences from the order flow than the market maker about the extra information. In this setting, competition among the informed traders has a very interesting form. The informed trader with the additional information trades less intensely on that information early on, and both informed traders trade very intensely on their common information. This makes it more difficult for the trader with less information to learn about the information he does not have. When there are only a few remaining trading periods and the information known to both traders has largely been revealed through their trading, then the trader with the additional information trades more intensely on the basis of his private information.

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