Journal of Financial Economics Vol. 138 No. 2 2020
Strategic trading and unobservable information acquisition
Abstract
We allow a strategic trader to choose when to acquire information about an asset’s payoff, instead of endowing her with it. When the trader dynamically controls the precision of a flow of information, the optimal precision evolves stochastically and increases with market liquidity. Because the trader exploits her information gradually, the equilibrium price impact and market uncertainty are unaffected by her rate of acquisition. If she pays a fixed cost to acquire “lumpy” information at a time of her choosing, the market can break down: we show that no equilibria exist with endogenous information acquisition. Our analysis suggests caution when applying insights from standard strategic trading models to settings with information acquisition.
- DOI
- 10.1016/j.jfineco.2020.05.007
- Volume
- 138
- Issue
- 2
- Pages
- 458-482
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref