Financial Decision Making with Endogenous Information

Financial Decision Making with Endogenous Information

Funder: EU Commission, Horizon 2020 Programme

Principal Investigator Marcin Kacperczyk

Duration: 4 years

This four-year research programme will examine how information flow is related to market structure in order to understand the mechanisms that drive economic decisions. Specifically the project will use the contexts of illegal insider trading and household finance to lay out the micro foundations for informed trading in investment and corporate settings. As income has risen rapidly in the last decade, particularly in the top bracket, the reasons for income inequality are of increasing interest, so this work, at the individual level, will develop a theoretical economic mechanism which could allow inexperienced investors to create an optimal information strategy and manage their assets portfolio in markets with more savvy investors, thereby reducing degrees of inequality.

This model will also be applied to competitive markets to examine the relationship between trades and price, where large investors actively and strategically limit access to information in order to influence the price. This is particularly pertinent in the case of insider trading which this research will examine, focusing on the circulation and disguise of private information. Finally, the grant will consider the impact of organisational design on investment decisions by studying mergers that explain the relationship between information received and performance of fund managers within firms.

Key research themes 

  • Household finance – this section of the project will develop a tractable general equilibrium model to examine the behaviour of returns, asset turnover, and trends in household participation in asset markets, as well as the volatility of equity returns.
  • Market power and competitive fringe – will consider the implications of models with and without market power as a diagnostic tool to identify potential collusion in financial markets.
  • Insider trading – will examine the unlikely cases–agents who are passed secret information that gives them advantage over other market participants.
  • Firm boundaries – will analyse a setting in which the impact on fund managers’ inputs (information) and output (portfolio choice, performance, and tracking error) can be observed in response to different decision making inside organisations, providing more direct evidence of whether and how investment decisions are affected by organisational form.