1. False News, Informational Efficiency, and Price Reversals
- Author
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Thierry Foucault, Jérôme Dugast, Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), and HEC Paris Research Paper Series
- Subjects
Big Data ,JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G10 - General ,Financial economics ,Lag ,Big data ,ComputerApplications_COMPUTERSINOTHERSYSTEMS ,Asset (computer security) ,FinTech ,Econometrics ,news, high-frequency trading, price reversals, informational efficiency, mini-flash crashes ,Contrarian and momentum trading ,JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G30 - General ,business.industry ,Noise (signal processing) ,Stochastic game ,Information processing ,Information Processing ,jel:G12 ,jel:G10 ,JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G14 - Information and Market Efficiency • Event Studies • Insider Trading ,jel:G14 ,JEL: M - Business Administration and Business Economics • Marketing • Accounting • Personnel Economics/M.M4 - Accounting and Auditing/M.M4.M41 - Accounting ,JEL: D - Microeconomics/D.D6 - Welfare Economics/D.D6.D61 - Allocative Efficiency • Cost–Benefit Analysis ,Value (economics) ,Asset Price Informativeness ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,business ,Markets for Information ,JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G12 - Asset Pricing • Trading Volume • Bond Interest Rates ,News ,High-Frequency Trading ,Price Reversals ,Informational Efficiency ,Mini-Flash Crashes - Abstract
Speculators can discover whether a signal is true or false by processing it but this takes time. Hence they face a trade-off between trading fast on a signal (i.e., before processing it), at the risk of trading on a false positive, or trading after processing the signal, at the risk that prices already reflect their information. The number of speculators who choose to trade fast increases with news reliability and decreases with the cost of fast trading technologies. The authors derive testable implications for the effects of these variables on (i) the value of information, (ii) patterns in returns and trades, (iii) the frequency of price reversals in a stock, and (iv) informational efficiency. Cheaper fast trading technologies simultaneously raise informational efficiency and the frequency of "mini-flash crashes": large price movements that revert quickly.
- Published
- 2014