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Buy on Rumours - Sell on News: A Manipulative Trading Strategy

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Author Info

  • Markus K Brunnermeier

Abstract

A trader who receives a signal about a future public announcement can exploit this private information twice. First, when he receives his signal, and second, at the time of the public announcement. The second round advantage occurs because the early-informed trader can best infer the extent to which his information is already reflected in the current price. This paper shows that early-informed traders trade very aggressively at the time they receive their signal. They try to manipulate the price in order to enhance their informational advantage at the time of the public announcement. In addition, they speculate by building up a position in period one, which they partially unwind on average in period tow. The analysis shows that informational leakage makes prices prior to public announcements more informative but reduces informational efficiency in the long run.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp309.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp309.

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Date of creation: Nov 1998
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Handle: RePEc:fmg:fmgdps:dp309

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Web page: http://www.lse.ac.uk/fmg/

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Cited by:
  1. Sander, Harald & Kleimeier, Stefanie, 2006. "Interest Rate Pass-Through In the Common Monetary Area of the SACU Countries," Research Memorandum 023, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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