Job Market Paper

"Learning from Trades"

Abstract

Buyers learn about the distribution of options on the market from many types of information. This paper analyses the efficiency of various information regimes in a dynamic market model with pairwise meetings where buyers face an unknown distribution of options. I show that, contrary to the intuition that more information leads to greater market efficiency, a market where buyers learn about the unknown distribution from a private signal with an equilibrium-determined precision ("trade signal") may be less efficient than a market where buyers do not receive this signal. The trade signal reveals to a buyer whether a randomly chosen seller traded in the previous period. In equilibrium, observing that the seller traded is good news about the unknown distribution. In contrast to the trade signal, a market where buyers learn from a private signal with a suitable exogenously given precision is more efficient than both a market where buyers do not receive a signal and a market where buyers know the distribution of options.