Learning from Trades. (24th May 2017)

• Record Type: Journal Article
• Authors: Mauring, Eeva
• Is Part Of: Economic journal. Volume 127:Number 601(2017)
• Page Start: 827
• Page End: 872
• Publication Date: 2017-05-24
• Subjects: Economics -- Periodicals; Économie politique -- Périodiques; 330.05
• DOI: 10.1111/ecoj.12484
• Languages: English
• ISSNs: 0013-0133

Abstract

Abstract : I study stationary cut‐off‐strategy equilibria of a dynamic market model where buyers sample sellers sequentially from an unknown distribution. Buyers learn about the distribution from the sampled sellers and a 'trade signal'. The trade signal reveals whether a randomly chosen seller traded yesterday. Observing a trade (as opposed to no trade) is good news about the distribution. Buyers who observe a trade use a higher cut‐off than buyers who observe no trade, despite buyers' learning from sampled sellers that puts a countervailing pressure on the cut‐offs. The trade signal may reduce market efficiency, while an appropriate exogenous signal increases efficiency.