Price informativeness and adaptive trading

Huanhuan Zheng and Haiqiang Chen ()
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Haiqiang Chen: Xiamen University

Journal of Evolutionary Economics, 2019, vol. 29, issue 4, No 7, 1315-1342

Abstract: Abstract We propose a structural model in which utility-maximizing investors strategically switch between the fundamental and chartist trading strategy in a market with asymmetric information. Their adaptive trading behavior generates an evolving price discovery process that reshapes the market environment, which then feeds back on their subsequent trading actions. The model implies that the price is more informative in terms of incorporating new information about the fundamental value when the asset is significantly mispriced and when the information is more precise. These theoretical predictions are supported by empirical evidence based on I/B/E/S data from January 2000 to December 2015.

Keywords: Price informativeness; Trading heterogeneity; Market efficiency; Price discovery (search for similar items in EconPapers)
JEL-codes: D52 D83 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00191-018-0586-0

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