Market informational inefficiency, risk aversion and quantity grid

Stefano Lovo and Jean-Paul Décamps

No 770, HEC Research Papers Series from HEC Paris

Abstract: In this paper we show that long run market informational inefficiency is perfectly compatible with standard rational sequential trade models. Our inefficiency result is obtained taking into account two features of actual financial markets: tradable quantities belong to a quantity grid and traders and market makers do not have the same degree of risk aversion. The implementation of our model for reasonable values of the parameters suggests that the long term deviations between asset prices and fundamental value are important. We explain the ambiguous role of the quantity grid in exacerbating or mitigating market inefficiency. We show that stock splits can improve the information content of the order flow and consequently increase price volatility.

Keywords: informational efficiency; quantity grid; stock splits (search for similar items in EconPapers)
JEL-codes: D82 D83 G14 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2003-01-09
New Economics Papers: this item is included in nep-cfn and nep-fin
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Related works:
Working Paper: Market Informational Inefficiency, Risk Aversion and Quantity Grid (2003)
Working Paper: Market Informational Inefficiency, Risk Aversion and Quantity Grid (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0770

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