The paper analyzes the effects of strategic behavior by an insider
in a price discovery process, akin to an information tatonnement,
in the presence of a competitive informed sector. Such processes
are used in the preopening period of continuous trading systems in
several exchanges. It is found that the insider manipulates the
market using a contrarian strategy in order to neutralize the
effect of the trades of competitive informed agents. Furthermore,
consistently with the empirical evidence ...
The paper analyzes the effects of strategic behavior by an insider
in a price discovery process, akin to an information tatonnement,
in the presence of a competitive informed sector. Such processes
are used in the preopening period of continuous trading systems in
several exchanges. It is found that the insider manipulates the
market using a contrarian strategy in order to neutralize the
effect of the trades of competitive informed agents. Furthermore,
consistently with the empirical evidence available, we find that
information revelation accelerates close to the opening, that the
market price does not converge to the fundamental value no matter
how many rounds the tatonnement has, and that the expected trading
volume displays a U-shaped pattern. We also find that a market with
a larger competitive sector (smaller insider) has an improved
informational efficiency and an increased trading volume. The
insider provides a public good (a lower informativeness of the price)
for the competitive informed sector.
+