Citation

Discussion Paper Details

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Title: Strategic Behaviour and Price Discovery

Author(s): Luis Angel Medrano and Xavier Vives

Publication Date: December 1997

Keyword(s): contrarian behaviour, information t�tonnement, insider training, market manipulation, market microstructure and preopening auction

Programme Area(s): Financial Economics

Abstract: The paper analyses the effects of strategic behaviour by an insider in a price discovery process, akin to an information t�tonnement, in the presence of a competitive informed sector. Such processes are used in the pre-opening 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, consistent 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 t�tonnement 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 (reducing the informativeness of the price) for the competitive informed sector.

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Bibliographic Reference

Medrano, L and Vives, X. 1997. 'Strategic Behaviour and Price Discovery'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1768