Strategic Trading in a Dynamic Noisy Market


  • Dimitri Vayanos

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    • MIT and NBER. I thank Anat Admati, Denis Gromb, Pete Kyle, Andy Lo, Lee-Bath Nelson, Paul Pfleiderer, Jose Scheinkman, Matt Spiegel, Ren6 Stulz, Rangarajan Sundaram, Jean Tirole, Jiang Wang, Ingrid Werner, Jeff Zwiebel, seminar participants at Chicago, Harvard, LSE, MIT, UCSD, and participants at the Western Finance Association, NBER market microstructure, and European Econometric Society conferences for very helpful comments. I am especially grateful to Avanidhar Subrahmanyam for many valuable comments and suggestions. I thank Muhamet Yildiz for excellent research assistance.


This paper studies a dynamic model of a financial market with a strategic trader. In each period the strategic trader receives a privately observed endowment in the stock. He trades with competitive market makers to share risk. Noise traders are present in the market. After receiving a stock endowment, the strategic trader is shown to reduce his risk exposure either by selling at a decreasing rate over time or by selling and then buying back some of the shares sold. When the time between trades is small, the strategic trader reveals the information regarding his endowment very quickly.