Gradual Information Diffusion and Asset Price Momentum

Shengle Lin

Working Papers from Chapman University, Economic Science Institute

Abstract: Gradual information diffusion model predicts that as private information travels across the population, pricing accuracy would improve and asset prices would exhibit momentum as a result. In laboratory markets I investigate the market’s aggregation capacity in response to varying proportions of informed traders as a consequence of information diffusion. The results demonstrate that pricing errors are high when private information is dispersed and that, as the information spreads, the market gradually revise the errors and manifest momentum. Analysis suggests that aggregation under dispersed information conditions is hampered by three factors: equilibrium multiplicity, slow arrival of myopic traders, and anonymous trading.

Pages: 45 pages
Date: 2010-01
New Economics Papers: this item is included in nep-cta and nep-mst
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:10-04

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