Journal Article

Strategic Trading and Welfare in a Dynamic Market

Dimitri Vayanos

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 66, issue 2, pages 219-254
Published in print April 1999 | ISSN: 0034-6527
Published online April 1999 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00086
Strategic Trading and Welfare in a Dynamic Market

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This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behaviour increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order 1/N, and not 1/N2 as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.

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Subjects: Economics

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