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Noisy Signalling in Financial Markets

Bossaerts, Peter and Hughson, Eric (1991) Noisy Signalling in Financial Markets. Social Science Working Paper, 764. California Institute of Technology , Pasadena, CA. (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20170830-163107142

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Abstract

Separating signaling equilibria of financial markets with anonymous insiders are investigated. Definitions of separating signaling equilibria are extended to allow for the noise that provides anonymity. The role of noise in equilibrium existence results is clarified. In particular, the result of Glosten and Madhavan, that noise is necessary for dealer markets to remain open, is qualified. The separating signaling equilibrium is written as the solution to a central planner's problem. Besides facilitating computation, this formulation highlights: (i) the critical nature of incentive compatibility constraints. (ii) the welfare aspects . The former causes many equilibrium price-quantity schedules to be non-linear and non-differentiable. An analysis of the latter leads to the conclusion that Pareto-efficient outcomes can be approximated by a repeated version of an insider game.


Item Type:Report or Paper (Working Paper)
ORCID:
AuthorORCID
Bossaerts, Peter0000-0003-2308-2603
Additional Information:The authors gratefully acknowledge comments from their colleagues at Caltech, in particular from Kim Border, Mahmoud El-Gamal and Tom Palfrey, and from seminar participants at Carnegie Mellon University.
Group:Social Science Working Papers
Subject Keywords:noisy signaling, dealership market, market microstructure, asymmetric information
Series Name:Social Science Working Paper
Issue or Number:764
Classification Code:JEL: 026, 311, 313
Record Number:CaltechAUTHORS:20170830-163107142
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20170830-163107142
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81004
Collection:CaltechAUTHORS
Deposited By: Jacquelyn Bussone
Deposited On:30 Aug 2017 23:41
Last Modified:03 Oct 2019 18:37

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