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Price informativeness and adaptive trading

Author

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  • Huanhuan Zheng

    (National University of Singapore)

  • Haiqiang Chen

    (Xiamen University)

Abstract

We propose a structural model in which utility-maximizing investors strategically switch between the fundamental and chartist trading strategy in a market with asymmetric information. Their adaptive trading behavior generates an evolving price discovery process that reshapes the market environment, which then feeds back on their subsequent trading actions. The model implies that the price is more informative in terms of incorporating new information about the fundamental value when the asset is significantly mispriced and when the information is more precise. These theoretical predictions are supported by empirical evidence based on I/B/E/S data from January 2000 to December 2015.

Suggested Citation

  • Huanhuan Zheng & Haiqiang Chen, 2019. "Price informativeness and adaptive trading," Journal of Evolutionary Economics, Springer, vol. 29(4), pages 1315-1342, September.
    • Handle: RePEc:spr:joevec:v:29:y:2019:i:4:d:10.1007_s00191-018-0586-0
    DOI: 10.1007/s00191-018-0586-0
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    References listed on IDEAS

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    Cited by:

    1. Zheng, Huanhuan, 2020. "Coordinated bubbles and crashes," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Price informativeness; Trading heterogeneity; Market efficiency; Price discovery;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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