Hostname: page-component-7c8c6479df-8mjnm Total loading time: 0 Render date: 2024-03-29T07:55:45.468Z Has data issue: false hasContentIssue false

Bullish/Bearish Strategies of Trading: A Nonlinear Equilibrium

Published online by Cambridge University Press:  06 April 2009

Ramdan Dridi
Affiliation:
Ecole Supérieure de Commerce de Toulouse, Groupe de Finance, 20 boulevard Lascrosses, BP 7010, 31068 Toulouse cedex 7, France
Laurent Germain
Affiliation:
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.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A., and Pfleiderer, P.. “Selling and Trading on Information in Financial Markets.” American Economic Review, 78 (1988a), 11651183.Google Scholar
Admati, A., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1988b), 340.CrossRefGoogle Scholar
Admati, A., and Pfleiderer, P.. “Direct and Indirect Sale of Information.” Econometrica, 58 (1990), 901928.CrossRefGoogle Scholar
Algert, P. M.Estimates of Non-linearity in the Response of Stock Prices to Order Imbalances.” Mimeo, Univ. of California, Berkeley (1990).Google Scholar
Back, K.Insider Trading in Continuous Time.” Review of Financial Studies, 5 (1992), 387402.Google Scholar
Bhattacharya, U., and Spiegel, M.. “Insiders, Outsiders, and Market Breakdowns.” Review of Financial Studies, 4 (1991), 255282.CrossRefGoogle Scholar
Biais, B.; Hillion, P.; and Spatt, C.. “An Empirical Analysis of the Order Book and the Order Flow in the Paris Bourse.” Journal of Finance, 50 (1995), 16551689.Google Scholar
Brav, A., and Lehavy, R.. “An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long-Term Dynamics.” Journal of Finance, 58 (2003), 19331968.CrossRefGoogle Scholar
Cho, K.-H., and Karoui, N. El. “Insider Trading and Non-linear Equilibria: Single Auction Case.” Annales d'Economie et de Statistique, 60 (2000), 2142.CrossRefGoogle Scholar
De Jong, F.; Nijman, T.; and Röell, A.. “A Comparison of the Cost of Trading French Shares on the Paris Bourse and on the SEAQ International.” European Economic Review, 39 (1998), 12771301.Google Scholar
Dridi, R., and Germain, L.. “Noise and Competition in Strategic Oligopoly.” Mimeo, Toulouse Business School (1999).CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 6990.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Time and the Process of Security Price Adjustment.” Journal of Finance, 47 (1992), 577605.CrossRefGoogle Scholar
Foster, F. D., and Viswanathan, S.. “A Theory of the Inter-day Variations in Volume, Variance, and Trading Costs in Securities Markets.” Review of Financial Studies, 3 (1990), 593624.CrossRefGoogle Scholar
Foster, F. D., and Viswanathan, S.. “Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models.” Journal of Finance, 48 (1993), 187211.CrossRefGoogle Scholar
Foster, F. D., and Viswanathan, S.. “Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information.” Journal of Financial and Quantitative Analysis, 29 (1994), 499518.Google Scholar
Foster, F. D., and Viswanathan, S.. “Strategic Trading when Agents Forecast the Forecasts of Others.” Journal of Finance, 51 (1996), 14371478.CrossRefGoogle Scholar
Gennotte, G., and Leland, H.. “Market Liquidity, Hedging and Crashes.” American Economic Review, 80 (1990), 9991021.Google Scholar
Glosten, L., and Milgrom, P.. “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (1985), 71100.CrossRefGoogle Scholar
Grossman, S. J. “On the Efficiency of Competitive Stock Markets where Traders Have Diverse Information.” Journal of Finance, 31 (1976), 573585.CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393408.Google Scholar
Hasbrouck, J.Trades, Quotes, Inventories and Information.” Journal of Financial Economics, 22 (1988), 229252.CrossRefGoogle Scholar
Hasbrouck, J.Measuring the Information Content of Stock Trades.” Journal of Finance, 46 (1991), 179207.CrossRefGoogle Scholar
Hausman, J. A.; Lo, A. W.; and MacKinlay, A. C.. “An Ordered Probit Analysis of Transaction Stock Prices.” Journal of Financial Economics, 31 (1992), 319379.CrossRefGoogle Scholar
Holden, C.W., and Subrahmanyam, A.. “Long-Lived Private Information and Imperfect Competition.” Journal of Finance, 47 (1992), 247270.Google Scholar
Kempf, A., and Korn, O.. “Market Depth and Order Size.” Journal of Financial Markets, 2 (1999), 2948.CrossRefGoogle Scholar
Kim, T.; Lin, J.-C.; and Slovin, M.. “Market Structure, Informed Trading, and Analysts' Recommendations.” Journal of Financial and Quantitative Analysis, 32 (1997), 507524.Google Scholar
Kyle, A. “Market Structure, Information, Futures Markets and Price Formation in International Agricultural Trade.” In Advanced Reading in Price Formation, Market Structure, and Price Instability, Story, , Schmitz, , and Sarris, , eds. Boulder and London: Westview Press (1984), 4564.Google Scholar
Kyle, A.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.CrossRefGoogle Scholar
Kyle, A.. “Informed Speculation with Imperfect Competition.” Review of Economic Studies, 56 (1989), 317356.Google Scholar
Nöldeke, G., and Tröger, T.. “On Linear Equilibria in the Kyle Model.” Mimeo, Univ. of Basel (1998).Google Scholar
O'Hara, M.Market Microstructure Theory.” Cambridge, MA: Blackwell Publishers (1995).Google Scholar
Rochet, J.-C., and Vila, J.-L.. “Insider Trading without Normality.” Review of Economic Studies, 61 (1994), 131152.CrossRefGoogle Scholar
Saar, G.Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation.” Review of Financial Studies, 14 (2001), 11531181.CrossRefGoogle Scholar
Seppi, D.Equilibrium Block Trading and Asymmetric Information.” Journal of Finance, 45 (1990), 7394.CrossRefGoogle Scholar
Subrahmanyam, A.Risk Aversion, Market Liquidity and Price Efficiency.” Review of Financial Studies, 4 (1991), 417441.CrossRefGoogle Scholar
Vives, X.The Speed of Information Revelation in a Financial Market Mechanism.” Journal of Economic Theory, 67 (1995), 178204.CrossRefGoogle Scholar
Womack, K.Do Brokerage Analysts' Recommendations Have Investment Value.” Journal of Finance, 51 (1996), 137167.CrossRefGoogle Scholar