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Market informational inefficiency, risk aversion and quantity grid

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  • LOVO, Stefano

    ()

  • DECAMPS, Jean-Paul

    ()
    (GREMAQ-IDEI Universite de Toulouse 1)

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.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 770.

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Length: 33 pages
Date of creation: 09 Jan 2003
Date of revision:
Handle: RePEc:ebg:heccah:0770

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Keywords: informational efficiency; quantity grid; stock splits;

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  1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 71-100, March.
  2. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, Econometric Society, vol. 68(4), pages 799-838, July.
  3. Décamps, Jean-Paul & Lovo, Stefano, 2003. "Risk Aversion and Herd Behavior in Financial Markets," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 246, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Gottlieb, Gary & Kalay, Avner, 1985. " Implications of the Discreteness of Observed Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 135-53, March.
  5. Marco Cipriani & Antonio Guarino, . "Herd Behavior and Contagion in Financial Markets," Working Papers, The George Washington University, Institute for International Economic Policy 2010-01, The George Washington University, Institute for International Economic Policy.
  6. Koski, Jennifer Lynch, 1998. "Measurement Effects and the Variance of Returns after Stock Splits and Stock Dividends," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(1), pages 143-62.
  7. Ohlson, James A. & Penman, Stephen H., 1985. "Volatility increases subsequent to stock splits: An empirical aberration," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(2), pages 251-266, June.
  8. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1427-1443, December.
  9. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  10. Yakov Amihud & Haim Mendelson & Jun Uno, 1999. "Number of Shareholders and Stock Prices: Evidence from Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 54(3), pages 1169-1184, 06.
  11. Biais, Bruno & Glosten, Larry & Spatt, Chester S, 2002. "The Microstructure of Stock Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3288, C.E.P.R. Discussion Papers.
  12. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 724-48, September.
  13. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
  14. Lee, In Ho, 1998. "Market Crashes and Informational Avalanches," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(4), pages 741-59, October.
  15. Lamoureux, Christopher G & Poon, Percy, 1987. " The Market Reaction to Stock Splits," Journal of Finance, American Finance Association, American Finance Association, vol. 42(5), pages 1347-70, December.
  16. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 62(2), pages 211-35, April.
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Cited by:
  1. Décamps, Jean-Paul & Lovo, Stefano, 2003. "Risk Aversion and Herd Behavior in Financial Markets," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 246, Institut d'Économie Industrielle (IDEI), Toulouse.

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