 Dampening effect and market efficiencyMng Guo Journal of Economic Dynamics and Control, 2023, vol. 148, issue C Abstract: The way informed traders use their privileged information affects the properties of asset prices. This paper analyzes the differences in market efficiency between the two most widely adopted informed trading paradigms (Grossman-Stiglitz-style and Kyle-style) in a unified three-period framework. The aggregate risk—the product of fundamental risk, liquidity trading risk, and traders’ risk aversion coefficient—uniquely determines three measures of market efficiencies, including price informativeness, return autocorrelations, and the unconditional expected utilities of uninformed market makers. In the Kyle-style model, a self-reinforcing dampening effect arises from informed traders’ trading on fundamental information and non-fundamental information about their prior positions, leading to less efficient markets, contrarian trading by informed traders, and a return reversal between the two trading periods. Our study proposes to estimate price informativeness using information from short-term return reversals. Keywords: Grossman-Stiglitz-style and kyle-style models; Dampening effect; Price informativeness and short-term return reversals; Contrarian trading; Aggregate risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:148:y:2023:i:c:s0165188923000106 DOI: 10.1016/j.jedc.2023.104604 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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