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Information linkages and correlated trading

Colla, Paolo and Mele, Antonio (2008) Information linkages and correlated trading. Financial Markets Group Discussion Papers (620). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase. Moreover, we find that information linkages improve or damage market depth, and lower or boost the traders’ profits, according to whether these linkages convey positively or negatively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by “neighbor” traders are positively correlated and trades generated by “distant” traders are negatively correlated.

Item Type: Monograph (Discussion Paper)
Official URL: https://www.fmg.ac.uk/
Additional Information: © 2008 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HF Commerce
JEL classification: G - Financial Economics > G0 - General > G00 - General
Date Deposited: 10 Jul 2009 13:55
Last Modified: 13 Sep 2024 20:07
URI: http://eprints.lse.ac.uk/id/eprint/24439

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