Universität Bonn

Department of Economics

Junyuan Zou - INSEAD

“Information Chasing versus Adverse Selection” joint with Gabor Pinter and Chaojun Wang


Contrary to the prediction of the classic adverse selection theory, more informed traders could receive better pricing relative to less informed traders in over-the-counter financial markets. Dealers actively chase informed orders to better position their future quotes and avoid winner's curse in subsequent trades. On a multi-dealer platform, dealers' incentive of information chasing exactly offsets their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market.

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