Communication Dilemma in Speculative Markets

39 Pages Posted: 2 Jun 2006

See all articles by Nevzat Eren

Nevzat Eren

University of Minnesota - Twin Cities - College of Liberal Arts

Han N. Ozsoylev

Ozyegin University

Date Written: March 2006

Abstract

We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, in equilibrium, information exchange.

Keywords: voluntary information exchange, prisoners' dilemma, communication dilemma, interpersonal costs

JEL Classification: D82, D84, G10

Suggested Citation

Eren, Nevzat and Ozsoylev, Han N., Communication Dilemma in Speculative Markets (March 2006). Available at SSRN: https://ssrn.com/abstract=905907 or http://dx.doi.org/10.2139/ssrn.905907

Nevzat Eren (Contact Author)

University of Minnesota - Twin Cities - College of Liberal Arts ( email )

Minneapolis, MN
United States

Han N. Ozsoylev

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

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