Information aggregation in financial markets with career concerns

What are the equilibrium features of a dynamic financial market in which traders care about their reputation for ability? We modify a standard sequential trading model to include traders with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. We characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders' reputational concerns has a negative effect on the extent of information that can be revealed in equilibrium but a positive effect on market liquidity.

[1]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[2]  Aarnout Brombacher,et al.  Probability... , 2009, Qual. Reliab. Eng. Int..

[3]  D. Scharfstein,et al.  Herd Behavior and Investment , 1990 .

[4]  Glenn Ellison,et al.  Career Concerns of Mutual Fund Managers , 1998 .

[5]  Robert E. Filman,et al.  Professional advice ∗ , 2004 .

[6]  Andrea Prat,et al.  Asset Price Dynamics When Traders Care About Reputation , 2005 .

[7]  Patrick J. Dennis,et al.  Who Blinks in Volatile Markets, Individuals or Institutions? , 2000 .

[8]  Andrea Prat,et al.  Institutional Trade Persistence and Long-Term Equity Returns , 2007 .

[9]  Andrea Prat,et al.  Financial equilibrium with career concerns , 2006 .

[10]  Hamid Sabourian,et al.  Herd Behavior in Efficient Financial Markets , 2006 .

[11]  Lones Smith,et al.  Pathological Outcomes of Observational Learning , 2000 .

[12]  Zhiguo He,et al.  Intermediation, Capital Immobility, and Asset Prices , 2006 .

[13]  A. Banerjee,et al.  A Simple Model of Herd Behavior , 1992 .

[14]  A. Kyle.  Continuous Auctions and Insider Trading , 1985 .

[15]  C. Avery,et al.  Multidimensional Uncertainty and Herd Behavior in Financial Markets , 1998 .

[16]  Marco Ottaviani,et al.  Professional Advice , 1999, J. Econ. Theory.

[17]  Brett Trueman.  Analyst Forecasts and Herding Behavior , 1994 .

[18]  Massimo Massa,et al.  Compensation and Managerial Herding: Evidence from the Mutual Fund Industry , 2007 .

[19]  Franklin Allen,et al.  Do Financial Institutions Matter , 2001 .

[20]  Ron Kaniel,et al.  Equilibrium Prices in the Presence of Delegated Portfolio Management , 2006 .

[21]  R. Sias,et al.  Reconcilable Differences: Momentum Trading By Institutions , 2005 .

[22]  Glenn Ellison,et al.  Risk Taking by Mutual Funds as a Response to Incentives , 1995, Journal of Political Economy.

[23]  Andrea Prat,et al.  The Wrong Kind of Transparency , 2002 .

[24]  In Ho Lee.  Market Crashes and Informational Avalanches , 1998 .

[25]  James Dow,et al.  Noise Trading, Delegated Portfolio Management, and Economic Welfare , 1994, Journal of Political Economy.

[26]  J. Chevalier,et al.  Herding over the career , 1999 .

[27]  S. Bikhchandani,et al.  You have printed the following article : A Theory of Fads , Fashion , Custom , and Cultural Change as Informational Cascades , 2007 .

[28]  Dimitri Vayanos,et al.  Flight to Quality, Flight to Liquidity, and the Pricing of Risk , 2004 .