False News, Informational Efficiency, and Price Reversals

Jérôme Dugast and Thierry Foucault

Working papers from Banque de France

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 news, 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. We 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.

Keywords: news; high-frequency trading; price reversals; informational efficiency; mini-flash crashes. (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2014
New Economics Papers: this item is included in nep-cta and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: False News, Informational Efficiency, and Price Reversals (2014)
Working Paper: False News, Informational Efficiency, and Price Reversals (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:513

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