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On the negative value of information in informationally inefficient markets: Calculations for large number of traders

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  • Pfeifer, Christian
  • Schredelseker, Klaus
  • Seeber, Gilg U.H.
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    Abstract

    In informationally inefficient markets, classical decision theory assumes the value of information to be positive. Recent developments, however, contradict this paradigm. Schredelseker [Schredelseker, K., 2001. Is the usefulness approach useful? Some reflections on the utility of public information. In: McLeay, S., Riccaboni, A. (Eds.), Contemporary Issues in Accounting Regulation, Kluwer Academic Publishers, Boston, pp. 135-153] proposed a simulation model wherein a single security is traded among non-cooperating and asymetrically informed traders. One of the main results was the fact that badly informed traders could expect higher returns than traders with more information. But Schredelseker was able to give exact results for a small number of traders only. The aim of this paper is to give reliable results for a sufficiently large number of traders for both the expected gain and the probability of gain larger than zero. We are using combinatorial methods in order to get exact results for badly informed traders and simulation techniques for results of traders with higher level of information. The exact results are used (error between exact results and simulation results for the first traders) to determine the number of samples which have to be drawn with the simulation algorithm. As a result it was possible to verify the negative value of information on gain for a sufficient large number of traders. Furthermore a partition of expected gain is given. Traders with less information seem to be in advantage because of that part of information which is unknown to them.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 195 (2009)
    Issue (Month): 1 (May)
    Pages: 117-126

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    Handle: RePEc:eee:ejores:v:195:y:2009:i:1:p:117-126

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Stochastic processes Value of information Inefficient markets Asymmetric information Simple random walk;

    References

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    1. Hakansson, Nils H & Kunkel, J Gregory & Ohlson, James A, 1982. " Sufficient and Necessary Conditions for Information to Have Social Value in Pure Exchange," Journal of Finance, American Finance Association, vol. 37(5), pages 1169-81, December.
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    Cited by:
    1. Florian Hauser & Bob Kaempff, 2013. "Evolution of trading strategies in a market with heterogeneously informed agents," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 575-607, July.

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