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Strategic trading and welfare in a dynamic market

Vayanos, Dimitri (1999) Strategic trading and welfare in a dynamic market. Review of Economic Studies, 66 (2). pp. 219-254. ISSN 1467-937X

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Abstract

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 behavior 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.

Item Type: Article
Official URL: http://www.blackwellpublishing.com/journals/ROES
Additional Information: This is an electronic version of an Article published in the Review of economic studies 66 (2) pp. 219-254 © 1999 Blackwell Publishing. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.
Library of Congress subject classification: H Social Sciences > HG Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 09 Nov 2005
URL: http://eprints.lse.ac.uk/449/

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