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Informed Trading

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Regency Ballroom C1
Hosted By: American Finance Association
  • Chair: Vincent Glode, University of Pennsylvania

Trading Volume and Time Varying Betas

Christopher Hrdlicka
,
University of Washington

Abstract

Existing models of trading volume depend on shocks to agent heterogeneity to generate trade. Consistent with the well known fact that betas of securities change dramatically over time, I propose a new mechanism where shocks to the riskiness of traded securities generate trade. This mechanism can operate concurrently with previous agent level heterogeneity mechanism, together amplifying each other. My model of this mechanism makes three novel predictions about trading volume and securities' time-varying risk exposures: trading volume and changes in risk exposures are positively correlated; decreases in risk exposure are associated with more trading volume than increases in risk exposure; and the trading volume response to changing risk exposure decreases with the level of the risk exposure. Measuring risk exposures as market betas, I find strong empirical support for these predictions. For example a one standard deviation decrease in beta leads to a 13\% increase in turnover. This sensitivity has grown along with the increase in trading volume, peaking at 73\%. My model also provides alternative explanations for three well documented links between trading volume and (contemporaneous as well as future) price changes

Dynamic Information Acquisition and Strategic Trading

Snehal Banerjee
,
University of California-San Diego
Bradyn Breon-Drish
,
University of California-San Diego

Abstract

Consider a strategic trader who dynamically chooses when to acquire costly information about an asset's payoff, instead of being endowed with this information. Whether the market maker observes acquisition is critical. Without observability, we show that an equilibrium with smooth trading and a pure acquisition strategy cannot exist. We also rule out the existence of a natural class of mixed-strategy equilibria. With observability, however, there exists an equilibrium in which optimal acquisition follows a pure strategy and generally exhibits delay. Our results suggest that many strategic trading equilibria considered in the literature are difficult to reconcile with dynamic information acquisition.

Speculation With Information Disclosure

Paolo Pasquariello
,
University of Michigan
Yifei Wang
,
University of Michigan

Abstract

Sophisticated financial market participants frequently choose to disclose private information to the public --- a phenomenon inconsistent with most theories of speculative trading. In this paper, we propose and test a model to bridge this gap. We show that when a speculator cares about both the short-term value of her portfolio and her long-term profit, information disclosure is incentive compatible: Disclosure in the form of a mixture of fundamental information and the speculator’s position induces competitive dealership to revise prices in the direction of the speculator’s position. Using mutual fund disclosure through newspaper articles, we find that when fund managers have stronger estimated short-term incentives, the frequency of strategic disclosures about stocks in their portfolios increases and those stocks’ liquidity improves, consistent with our model.
Discussant(s)
Yasser Boualam
,
University of North Carolina-Chapel Hill
Itay Goldstein
,
University of Pennsylvania
Diego Garcia
,
University of Colorado-Boulder
JEL Classifications
  • G1 - General Financial Markets