A Theory of Blind Trading
Differently sophisticated and informed investors coexist in most asset markets. At the same time, differently opaque trading avenues also coexist in most markets. We describe a simple environment where the second-best allocation calls precisely for this juxtaposition. Informed investors are useful because their presence provides the right incentives to generate the optimal volume and distribution of investment opportunities. The optimal opacity design serves to eliminate superfluous rents that would otherwise accrue to informed investors. The model makes precise predictions for the composition of different subsegment of a given asset markets and we argue that these predictions are consistent with the pertinent evidence.
Year of publication: |
2014
|
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Authors: | Quintin, Erwan ; Monnet, Cyril |
Institutions: | Society for Economic Dynamics - SED |
Saved in:
freely available
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