Market Informational Inefficiency, Risk Aversion and Quantity Grid
AbstractIn 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 InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 177.
Date of creation: 2003
Date of revision:
Publication status: Published in Journal of Mathematical Economics, vol.�42, n°1, 2006, p.�109-120.
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Other versions of this item:
- LOVO, Stefano & DECAMPS, Jean-Paul, 2003. "Market informational inefficiency, risk aversion and quantity grid," Les Cahiers de Recherche 770, HEC Paris.
- G1 - Financial Economics - - General Financial Markets
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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