Information Spillovers in Asset Markets with Correlated Values

Abstract We study information spillovers in a dynamic setting with privately informed traders and correlated asset values. A trade of one asset (or lack thereof) can provide information about the quality of other assets in the market. We show that, because the information content of trading behavior is endogenously determined, there exist multiple equilibria when the correlation between asset values is sufficiently high and the market is sufficiently transparent. The equilibria are ranked in terms of both trade volume and efficiency. We study the implications for policies that target market transparency as well as the market's ability to aggregate information. Total welfare is higher when the market is fully transparent than when it is fully opaque. However, both welfare and trading activity can decrease in the degree of market transparency. If traders have asymmetric access to transaction data, transparency levels the playing field, reduces the rents of more informed traders, but may reduce total welfare. Finally, we show that information is not necessarily efficiently aggregated as the number of informed traders becomes arbitrarily large