The time cost of information in financial markets. (English) Zbl 1419.91670
Summary: I model a financial market in which traders acquire private information through time-consuming research. A time cost of information arises due to competition – through the expected adverse price movements due to others’ trades – causing traders to rush to trade on weak information. This cost monotonically increases with asset value uncertainty, so that, exactly opposite to the result under the standard modeling assumption of a monetary cost of information, traders acquire the least information when this uncertainty is largest. The model makes several novel testable predictions regarding volume and order imbalances, some of which have existing empirical support.
References:
| [1] | Admati, A.; Pfleiderer, P., A theory of intraday patterns: volume and price variability, Rev. Financ. Stud., 1, 1, 3-40 (1988) |
| [2] | Aslan, H.; Easley, D.; Hvidkjaer, S.; O’Hara, M., The characteristics of informed trading: implications for asset pricing, J. Empir. Finance, 18, 782-801 (2011) |
| [3] | Barber, B.; Odean, T., All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors, Rev. Financ. Stud., 21, 2, 785-818 (2008) |
| [4] | Banerjee, S., Breon-Drish, B., 2017. Dynamic information acquisition and strategic trading. Mimeo. SSRN.; Banerjee, S., Breon-Drish, B., 2017. Dynamic information acquisition and strategic trading. Mimeo. SSRN. |
| [5] | Barlevy, G.; Veronesi, P., Information acquisition in financial markets, Rev. Econ. Stud., 67, 1, 79-90 (2000) · Zbl 0955.91038 |
| [6] | Barlevy, G., Veronesi, P., 2007. Information acquisition in financial markets: a correction. Mimeo. Federal Reserve Bank of Chicago.; Barlevy, G., Veronesi, P., 2007. Information acquisition in financial markets: a correction. Mimeo. Federal Reserve Bank of Chicago. · Zbl 0955.91038 |
| [7] | Barlevy, G.; Veronesi, P., Rational panics and stock market crashes, J. Econ. Theory, 110, 234-263 (2003) · Zbl 1042.91033 |
| [8] | Biais, B.; Foucault, T.; Moinas, S., Equilibrium fast trading, J. Financ. Econ., 116, 2, 292-313 (2015) |
| [9] | Bond, P.; Edmans, A.; Goldstein, I., The real effects of financial markets, Annu. Rev. Financ. Econ., 4, 339-360 (2012) |
| [10] | Boot, A.; Thakor, A., The many faces of information disclosure, Rev. Financ. Stud., 14, 4, 1021-1057 (2001) |
| [11] | Bouvard, M.; Lee, S., Risk management failures (2015), ECGI Finance Working Paper No. 454 |
| [12] | Brunnermeier, M.; Pedersen, L., Predatory trading, J. Finance, 60, 4, 1825-1863 (2005) |
| [13] | Bulow, J.; Klemperer, P., Rational frenzies and crashes, J. Polit. Econ., 102, 1, 1-23 (1994) |
| [14] | Chamley, C., Complementarites in information acquisition with short-term trades, Theor. Econ., 2, 441-467 (2007) |
| [15] | Chamley, C.; Gale, D., Information revelation and strategic delay in a model of investment, Econometrica, 62, 5, 1065-1085 (1994) · Zbl 0813.90144 |
| [16] | Chari, V.; Kehoe, P., Financial crises as herds: overturning the critiques, J. Econ. Theory, 119, 128-150 (2004) · Zbl 1080.91029 |
| [17] | Cipriani, M.; Guarino, A., Estimating a structural model of herd behavior in financial markets, Am. Econ. Rev., 104, 1, 224-251 (2014) |
| [18] | Diamond, D., Optimal release of information by firms, J. Finance, 40, 1071-1094 (1985) |
| [19] | Dugast, J.; Foucault, T., Data abundance and asset price informativeness, J. Financ. Econ. (2017), forthcoming |
| [20] | Easley, D.; Kiefer, N.; O’Hara, M.; Paperman, J., Liquidity, information, and infrequently traded stocks, J. Finance, 51, 4, 1405-1436 (1996) |
| [21] | Foster, F.; Viswanathan, S., A theory of the intraday variations in volume, variance, and trading costs in securities markets, Rev. Financ. Stud., 3, 4, 593-624 (1990) |
| [22] | Foucault, T.; Hombert, J.; Roşu, I., News trading and speed, J. Finance, LXXI, 1, 335-382 (2016) |
| [23] | Glode, V.; Green, R.; Lowery, R., Financial expertise as an arms race, J. Finance, LXVII, 5, 1723-1759 (2012) |
| [24] | Glosten, L.; Milgrom, P., Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders, J. Financ. Econ., 14, 71-100 (1985) |
| [25] | Gul, F.; Lundholm, R., Endogenous timing and the clustering of agents’ decisions, J. Polit. Econ., 103, 5, 1039-1066 (1995) |
| [26] | Grenadier, S., Option exercise games: an application to the equilibrium investment strategies of firms, Rev. Financ. Stud., 15, 3, 691-721 (2002) |
| [27] | Grossman, S.; Stiglitz, J., On the impossibility of informationally efficient markets, Am. Econ. Rev., 70, 3, 393-408 (1980) |
| [28] | Harsanyi, J., Games with randomly disturbed payoffs: a new rationale for mixed-strategy equilibrium points, Int. J. Game Theory, 2, 1-23 (1973) · Zbl 0255.90084 |
| [29] | Hasbrouck, J., Measuring the information content of stock trades, J. Finance, XLVI, 1, 179-207 (1991) |
| [30] | Hayek, The Use of Knowledge in Society, American Economic Review, vol. XXXV, No. 4, 519-530 (1945), American Economic Association |
| [31] | Holden, C.; Subrahmanyam, A., Long-lived private information and imperfect competition, J. Finance, 47, 1, 247-270 (1992) |
| [32] | Holthausen, R.; Verrecchia, R., The effect of informedness and consensus on price and volume behavior, Account. Rev., 65, 1, 191-208 (1990) |
| [33] | Indjejikian, R., The impact of costly information interpretation on firm disclosure decisions, J. Account. Res., 29, 2, 277-301 (1990) |
| [34] | Jiang, G.; Lee, C.; Zhang, Y., Information uncertainty and expected returns, Rev. Acc. Stud., 10, 185-221 (2005) |
| [35] | Kandel, E.; Pearson, N., Differential interpretation of public signals and trade in speculative markets, J. Polit. Econ., 103, 4, 831-872 (1995) |
| [36] | Kendall, C., 2018. Market panics, frenzies, and informational efficiency: theory and experiment. Mimeo. University of Southern California.; Kendall, C., 2018. Market panics, frenzies, and informational efficiency: theory and experiment. Mimeo. University of Southern California. |
| [37] | Kulatilaka, N.; Perotti, E., Strategic growth options, Manag. Sci., 44, 8, 1021-1031 (1998) · Zbl 1008.91505 |
| [38] | Kyle, A., Continuous auctions and insider trading, Econometrica, 53, 6, 1315-1335 (1985) · Zbl 0571.90010 |
| [39] | Kyle, A., Informed speculation with imperfect competition, Rev. Econ. Stud., 56, 3, 317-355 (1989) · Zbl 0669.90016 |
| [40] | Kumar, A., Hard-to-value stocks, behavioral biases, and informed trading, J. Financ. Quant. Anal., 44, 6, 1375-1401 (2009) |
| [41] | Kuo, W.; Li, Y. C., Trading mechanisms and market quality: call markets versus continuous auction markets, Int. Rev. Finance, 11, 4, 417-444 (2011) |
| [42] | Li, J., 2015. Slow price adjustment to public news in after-hours trading. Mimeo. University of California. Los Angeles.; Li, J., 2015. Slow price adjustment to public news in after-hours trading. Mimeo. University of California. Los Angeles. |
| [43] | Lee, I., Market crashes and information avalanches, Rev. Econ. Stud., 65, 741-759 (1998) · Zbl 0913.90051 |
| [44] | Lew, S., 2013. Endogenous information acquisition with sequential trade. Mimeo. London School of Economics.; Lew, S., 2013. Endogenous information acquisition with sequential trade. Mimeo. London School of Economics. |
| [45] | Malinova, K.; Park, A., The impact of competition and information on intraday trading, J. Bank. Finance, 44, 55-71 (2014) |
| [46] | Malinova, K.; Park, A., Trading volume in dealer markets, J. Financ. Quant. Anal., 45, 6, 1447-1484 (2010) |
| [47] | Manela, A., The value of diffusing information, J. Financ. Econ., 111, 1, 181-199 (2014) |
| [48] | Mitchell, M.; Pulvino, T.; Stafford, E., Limited arbitrage in equity markets, J. Finance, LVII, 2, 551-584 (2002) |
| [49] | Nikandrova, A., 2014. Informational and allocative efficiency in financial markets with costly information. Mimeo. University of London, Birkbeck.; Nikandrova, A., 2014. Informational and allocative efficiency in financial markets with costly information. Mimeo. University of London, Birkbeck. |
| [50] | Ostrovsky, M., Information aggregation in dynamic markets with strategic traders, Econometrica, 80, 6, 2595-2647 (2012) · Zbl 1274.91289 |
| [51] | Pedersen, L., When everyone runs for the exit, Int. J. Cent. Bank., 5, 177-199 (2009) |
| [52] | Romer, D., Rational asset-price movements without news, Am. Econ. Rev., 83, 5, 1112-1130 (1993) |
| [53] | Shleifer, A.; Vishny, R., The limits of arbitrage, J. Finance, 52, 35-55 (1997) |
| [54] | Smith, L., 1997. Do rational traders frenzy? Mimeo. Massachusetts Institute of Technology.; Smith, L., 1997. Do rational traders frenzy? Mimeo. Massachusetts Institute of Technology. |
| [55] | Smith, L., Private information and trade timing, Am. Econ. Rev., 90, 4, 1012-1018 (2000) |
| [56] | Verrecchia, R., Information acquisition in a noisy rational expectations economy, Econometrica, 50, 6, 1415-1430 (1982) · Zbl 0493.90024 |
| [57] | Veldkamp, L., Information markets and the comovement of asset prices, Rev. Econ. Stud., 73, 823-845 (2006) · Zbl 1145.91354 |
| [58] | Veldkamp, L., Media frenzies in markets for financial information, Am. Econ. Rev., 96, 3, 577-601 (2006) |
| [59] | Weeds, H., Strategic delay in a real options model of R&D competition, Rev. Econ. Stud., 69, 3, 729-747 (2002) · Zbl 1038.91052 |
| [60] | Weller, B., Does algorithmic trading deter information acquisition, Rev. Financ. Stud. (2018), forthcoming |
| [61] | Zhang, X., Information uncertainty and stock returns, J. Finance, LXI, 1, 105-136 (2006) |
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.
