Information concerning markets is diverse and traders are faced with multiple dimensions or sources of uncertainty. The sources of information especially for macro trading is varied. It can be government economic announcements, policy changes, speeches, capital flows, hedging behavior, and in the case of most global markets, this information is across numerous countries. All of this information is subject to revisions, uncertainty, volatility, ambiguity and complexity.
The level of complexity between information and uncertainty causes many traders to specialize and find comparative advantages in different types of information gathering and processing. Some traders follow flow, other follow firm fundamentals, macro information, or technical price information. Some will be micro traders getting into the specifics of firms while other focus on macro risk premiums. One trader normally does not do it all in terms of processing information. Consequently, market prices are determined by the combination of different types of informed traders. The diversity of information and specialization is what makes for active trading and differences of opinion. Market prices combine all of this information but the process of aggregation is not the work of any one but a set of individuals.
Given this diversity of information processing, there are some interesting questions concerning how markets participants behave relative to other traders. If a group of trading specialists have more information and trading more aggressively, there is a question whether other groups will also trade more aggressively or whether they will be deterred from using their information. If more aggressive behavior leads to other trading groups also to get aggressive, there is strategic complementarity in their behavior. If aggressive behavior deters others from trading, then there is strategic complementarity. These issues are addressed by Itay Goldstein and Liyan Yang in "Information diversity and complementarities in trading and information acquisition", paper published in the August Journal of Finance.
This paper deals with the complexities of how information from differences sources are used and exploited by other traders. If some traders use their information more aggressively, there can be an "uncertainty reduction effect", because other traders use or exploit there area of information advantages after they see these other traders act. However, there can also be an "inference augmentation effect" which causes some traders to not use their information as aggressively because there is more information from other sources that is moving prices. This is not an easy paper to work through, but it does cause some interesting thinking.
Diversity of opinion and types of traders in any market is a good thing. It helps to resolve uncertainty. In fact, different traders can confirm price behavior and make others feel more comfortable with their own trading. Take the case of the trend-followers. He does not follow fundamentals, but if fundamental traders are being more aggressive in their behavior it may make following trends easier. The fundamental flow will reinforce what is being told in the price dynamics. Without aggressive fundamental traders, trends may be more erratic. Similarly, if hedgers (producers) are aggressively changing their positions, this provides information to managed money investors who can infer information from this hedging behavior. Use other information outside your trading comfort zone to improve the use of your own information trading specialty. Follow the skill of others to help your own decision-making.
The level of complexity between information and uncertainty causes many traders to specialize and find comparative advantages in different types of information gathering and processing. Some traders follow flow, other follow firm fundamentals, macro information, or technical price information. Some will be micro traders getting into the specifics of firms while other focus on macro risk premiums. One trader normally does not do it all in terms of processing information. Consequently, market prices are determined by the combination of different types of informed traders. The diversity of information and specialization is what makes for active trading and differences of opinion. Market prices combine all of this information but the process of aggregation is not the work of any one but a set of individuals.
Given this diversity of information processing, there are some interesting questions concerning how markets participants behave relative to other traders. If a group of trading specialists have more information and trading more aggressively, there is a question whether other groups will also trade more aggressively or whether they will be deterred from using their information. If more aggressive behavior leads to other trading groups also to get aggressive, there is strategic complementarity in their behavior. If aggressive behavior deters others from trading, then there is strategic complementarity. These issues are addressed by Itay Goldstein and Liyan Yang in "Information diversity and complementarities in trading and information acquisition", paper published in the August Journal of Finance.
This paper deals with the complexities of how information from differences sources are used and exploited by other traders. If some traders use their information more aggressively, there can be an "uncertainty reduction effect", because other traders use or exploit there area of information advantages after they see these other traders act. However, there can also be an "inference augmentation effect" which causes some traders to not use their information as aggressively because there is more information from other sources that is moving prices. This is not an easy paper to work through, but it does cause some interesting thinking.
Diversity of opinion and types of traders in any market is a good thing. It helps to resolve uncertainty. In fact, different traders can confirm price behavior and make others feel more comfortable with their own trading. Take the case of the trend-followers. He does not follow fundamentals, but if fundamental traders are being more aggressive in their behavior it may make following trends easier. The fundamental flow will reinforce what is being told in the price dynamics. Without aggressive fundamental traders, trends may be more erratic. Similarly, if hedgers (producers) are aggressively changing their positions, this provides information to managed money investors who can infer information from this hedging behavior. Use other information outside your trading comfort zone to improve the use of your own information trading specialty. Follow the skill of others to help your own decision-making.
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