Strategic Interaction in a Stock Trading Chat Room

50 Pages Posted: 24 Jan 2011 Last revised: 17 Aug 2014

See all articles by Jie Lu

Jie Lu

Rutgers, The State University of New Jersey - New Brunswick/Piscataway

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: May 10, 2011

Abstract

We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also establish a symmetric Bayesian Nash equilibrium in which momentum traders pro…t from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders bene…t from following. We test and con…rm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room.

Keywords: chat room, strategic information, individual traders, behavioral finance

JEL Classification: G14

Suggested Citation

Lu, Jie and Mizrach, Bruce, Strategic Interaction in a Stock Trading Chat Room (May 10, 2011). Available at SSRN: https://ssrn.com/abstract=1746464 or http://dx.doi.org/10.2139/ssrn.1746464

Jie Lu

Rutgers, The State University of New Jersey - New Brunswick/Piscataway ( email )

94 Rockafeller Road
New Brunswick, NJ 08901
United States

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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