A comparison of stock market mechanisms

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper studies the relationship between the amount of public information that stock market prices incorporate and the equilibrium behavior of market participants. The analysis is framed in a static, NREE setup where traders exchange vectors of assets accessing multidimensional information under two alternative market structures. In the first (the unrestricted system), both informed and uninformed speculators can condition their demands for each traded asset on all equilibrium prices; in the second (the restricted system), they are restricted to condition their demand on the price of the asset they want to trade. I show that informed traders’ incentives to exploit multidimensional private information depend on the number of prices they can condition upon when submitting their demand schedules, and on the specific price formation process one considers. Building on this insight, I then give conditions under which the restricted system is more efficient than the unrestricted system.

Keywords: Financial economics; asset pricing; information and market efficiency (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2001-05, Revised 2003-11
New Economics Papers: this item is included in nep-fmk
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Related works:
Journal Article: A Comparison of Stock Market Mechanisms (2004)
Working Paper: A comparison of stock market mechanisms (2003)
Working Paper: A Comparison of Stock Market Mechanism (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:545

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