Information Percolation in Centralized Markets

We explore the effects of information propagation in a centralized financialmarket. Specifically, we embed search frictions within the Grossman andStiglitz (1980) framework, relying on information percolation as modeled inDuffie, Malamud, and Manso (2009). First, we show that information percolationproduces a positive autocorrelation in stock returns. Second, we introducea rumor among the population of investors which we let to propagate duringtwo periods. As trading approaches its final round and that the fundamentalvalue is close to be revealed, we let the rumor die out and show that it producesa strong price reversal toward the fundamental value. Importantly, informationpercolation introduces heterogeneity in individual precision among agents.This leads to drastically different investment strategies: agents who have beenmore efficient at gathering signals will tend to act as market makers. Whereas,agents who collected a lesser amount of signals will tend to be trend followers.[...]