Russ, David (2022) Multidimensional noise and non-fundamental information diversity. NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE, 59: 101593. ISSN 1062-9408, 1879-0860
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This paper relaxes the common assumption of the standard competitive noisy rational expectations framework that noise is one-dimensional. Within an environment characterized by multidimensional noise, I explore the strategic interactions between different traders that are informed about different components of the noise inherent in the market price. If noise is two-dimensional, several new types of complementarities in traders' interactions arise that cannot be studied in the classical one-dimensional framework. The higher-dimensional case uncovers that higher dimensionality of noise mitigates the possibility of a market breakdown by weakening adverse selection. On the basis of the theoretical results, I discuss some predictions and implications concerning the effects of the increased usage of "payment for order flow"in financial markets.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | COMPLEMENTARITIES; SPECULATION; Adverse selection; Noise trading; Non-fundamental information; Payment for order flow |
| Subjects: | 300 Social sciences > 330 Economics |
| Divisions: | Business, Economics and Information Systems > Institut für Volkswirtschaftslehre und Ökonometrie > Lehrstuhl für Theoretische Volkswirtschaft (Prof. Dr. Lutz Arnold) |
| Depositing User: | Dr. Gernot Deinzer |
| Date Deposited: | 31 May 2022 10:25 |
| Last Modified: | 31 May 2022 10:25 |
| URI: | https://pred.uni-regensburg.de/id/eprint/45573 |
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