Essays on Strategic Trading
Information in Noise: Strategic Trading under Autocorrelated Uninformed Orders. This paper extends the Foster and Viswanathan (1996) model by allowing uninformed orders to exhibit a general correlation structure which generates autocorrelation in the order flow. Since the order flow is predictable, informed traders and the market maker not only need to infer information about the asset value, but also forecast future order flows. The correlation structure of uninformed orders has significant effects on trading strategies, market liquidity, and the informativeness of prices. Since the empirical autocorrelation in order flows is likely to come from uninformed traders, strategic trading models should not assume them to be simply noise.
Strategic Trading when the Market Maker Has a Monopoly on Short-Lived Information: This paper develops a strategic trading model in which the market maker has a monopoly on short-lived information. Given that modern market makers are high frequency traders, it is assumed that market makers are able to process any short-lived information event faster than other traders. Since the market maker’s information is short-lived, informed traders sequentially learn about it and adjust their strategies accordingly. The correlation structure of the market maker’s short-lived information has significant effects on the dynamic trading equilibrium and can generate new stylized facts like negative trading intensities and non-monotonic news sensitivities.
Supervisor: Laurent Calvet, EDHEC Business School
External reviewer: Michael Ostrovsky, Stanford University
Other committee members: Nikolaos Tessaromatis and Raman Uppal, EDHEC Business School