Multidimensional noise and non-fundamental information diversity

This paper relaxes the common assumption of the standard competitive noisy rational expectations framework that noise is one-dimensional. Within an environment characterized by multidimensional noise, I explore the strategic interactions between different traders that are informed about different components of the noise inherent in the market price. If noise is two-dimensional, several new types of complementarities in traders' interactions arise that cannot be studied in the classical one-dimensional framework. The higher-dimensional case uncovers that higher dimensionality of noise mitigates the possibility of a market breakdown by weakening adverse selection. On the basis of the theoretical results, I discuss some predictions and implications concerning the effects of the increased usage of "payment for order flow"in financial markets.