Journal of Financial and Quantitative Analysis

Research Article

Bullish/Bearish Strategies of Trading: A Nonlinear Equilibrium

Ramdan Dridia1 and Laurent Germaina2

a1 Ecole Supérieure de Commerce de Toulouse, Groupe de Finance, 20 boulevard Lascrosses, BP 7010, 31068 Toulouse cedex 7, France

a2 l.germain@esc-toulouse.fr, Ecole Supérieure de Commerce de Toulouse, Groupe de Finance, Europlace Institute of Finance and SUPAERO, 20 boulevard Lascrosses, BP 7010, 31068 Toulouse cedex 7, France

Abstract

We study a financial market where risk-neutral traders are endowed with a signal that perfectly reveals the direction (but not the exact amount) of the liquidation value of a normally distributed risky asset. The impact of order flow on prices is nonlinear with a bullish/bearish information structure, which is broadly consistent with empirical evidence. Also, private information is revealed quicker than in a strategic oligopoly.

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