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The Distribution of Information and the Price Efficiency of Markets

Brice Corgnet (), Mark DeSantis and David Porter
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Mark DeSantis: Argyros School of Business and Economics & Economic Science Institute, Chapman University

Working Papers from Chapman University, Economic Science Institute

Abstract: Apparently contradictory evidence has accumulated regarding the extent to which financial markets are informationally efficient. Shedding new light on this old debate, we show that differences in the distribution of private information may explain why informational efficiency can vary greatly across markets. We find that markets are informationally efficient when complete information is concentrated in the hands of competing insiders whereas they are less efficient when private information is dispersed across traders. A learning model helps to illustrate why inferring others’ private information from prices takes more time when information is more dispersed. We discuss the implications of our findings for understanding the potential consequences of lowering the cost of information on the informational efficiency of markets.

Keywords: Information aggregation; information dispersion; market efficiency; experimental asset markets; learning models; cognitive finance (search for similar items in EconPapers)
JEL-codes: C92 G02 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-mst
Date: 2018
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