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    Informational and allocative efficiency in financial markets with costly information

    Nikandrova, Arina (2014) Informational and allocative efficiency in financial markets with costly information. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    Abstract Costly information acquisition is introduced into a dynamic trading model of Glosten and Milgrom (1985). The market maker and some traders, called "value traders," value the asset at its fundamental value, which can be either high or low. The remaining traders, called "liquidity traders," have idiosyncratic valuations that are independent of the fundamental. At a cost, each value trader can acquire an informative, but imperfect, signal about the fundamental. In this setting, at equilibrium, each value trader acquires the signal if and only if the uncertainty about the fundamental's value conditional on publicly available information is sufficiently high. Thus, the prices quoted by the market maker are "informationally inefficient," as they do not reveal the value of the fundamental, even in the long-run. Equilibrium amount of information acquisition is either excessive or insufficient relative to the social optimum and results in an inefficient allocation of the asset among the market maker and liquidity traders.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: ISSN 1745-8587: BWPEF 1403
    Keyword(s) / Subject(s): Sequential Trading, Cost of Information, Endogenous Information Acquisition
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 20 May 2016 13:09
    Last Modified: 01 Aug 2019 00:29
    URI: http://eprints.bbk.ac.uk/id/eprint/15282

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