A model of information diffusion with asymmetry and confidence effects in financial markets

Haijun Yang, Shu Qi, Zhou Zhang and David Koslowsky

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: We present a model of multi-period continuous information diffusion in financial markets. We show that price and trading volume exhibit asymmetric term structures to information flow, where the diffusion rate accelerates more slowly at short horizons than it decelerates at long horizons. Bounded rationality is modelled by an endogenous trader confidence index which declines as stock price information becomes noisier, where lower confidence translates into lower trading volume and slower price accretion. Information diffusion slows and asymmetries are accentuated as traders lose confidence in information accuracy. Our empirical findings support the model's predictions of asymmetric momentum patterns and confidence effects.

Keywords: Asymmetrical information diffusion; Confidence effects; Momentum; Financial markets (search for similar items in EconPapers)
JEL-codes: G11 G12 G40 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000395

DOI: 10.1016/j.najef.2021.101404

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