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Bullish/Bearish Strategies of Trading: A Nonlinear Equilibrium

Published online by Cambridge University Press:  06 April 2009

Ramdan Dridi  and
Laurent Germain
Ramdan Dridi
Affiliation:
Ecole Supérieure de Commerce de Toulouse, Groupe de Finance, 20 boulevard Lascrosses, BP 7010, 31068 Toulouse cedex 7, France
Laurent Germain
Affiliation:
[email protected], Ecole Supérieure de Commerce de Toulouse, Groupe de Finance, Europlace Institute of Finance and SUPAERO, 20 boulevard Lascrosses, BP 7010, 31068 Toulouse cedex 7, France
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Abstract

We study a financial market where risk-neutral traders are endowed with a signal that perfectly reveals the direction (but not the exact amount) of the liquidation value of a normally distributed risky asset. The impact of order flow on prices is nonlinear with a bullish/bearish information structure, which is broadly consistent with empirical evidence. Also, private information is revealed quicker than in a strategic oligopoly.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 4 , December 2004 , pp. 873 - 886
Copyright
Copyright © School of Business Administration, University of Washington 2004

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