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Informed trading, market efficiency and volatility

Author

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  • Sung, Ming-Chien
  • Johnson, Johnnie E.V.
  • McDonald, David C.J.

Abstract

We establish relationships that have proved difficult to capture in financial markets, between informed trading, efficiency and volatility. We examine the efficiency and volatility of market prices in 6058 parallel horserace betting exchange and bookmaker markets (1.8 million price points). We find that informed trading is associated with increased efficiency and volatility.

Suggested Citation

  • Sung, Ming-Chien & Johnson, Johnnie E.V. & McDonald, David C.J., 2016. "Informed trading, market efficiency and volatility," Economics Letters, Elsevier, vol. 149(C), pages 56-59.
  • Handle: RePEc:eee:ecolet:v:149:y:2016:i:c:p:56-59
    DOI: 10.1016/j.econlet.2016.10.015
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    References listed on IDEAS

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    1. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
    2. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    3. Michael A. Smith & David Paton & Leighton Vaughan Williams, 2006. "Market Efficiency in Person-to-Person Betting," Economica, London School of Economics and Political Science, vol. 73(292), pages 673-689, November.
    4. Marshall Gramm & Douglas H. Owens, 2006. "Efficiency in Pari-Mutuel Betting Markets across Wagering Pools in the Simulcast Era," Southern Economic Journal, Southern Economic Association, vol. 72(4), pages 926-937, April.
    5. Johnnie E. V. Johnson & Owen Jones & Leilei Tang, 2006. "Exploring Decision Makers' Use of Price Information in a Speculative Market," Management Science, INFORMS, vol. 52(6), pages 897-908, June.
    6. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-1153, September.
    7. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    8. Tavakoli, Manouchehr & McMillan, David & McKnight, Phillip J., 2012. "Insider trading and stock prices," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 254-266.
    9. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
    10. Law, David & Peel, David A, 2002. "Insider Trading, Herding Behaviour and Market Plungers in the British Horse-Race Betting Market," Economica, London School of Economics and Political Science, vol. 69(274), pages 327-338, May.
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    Cited by:

    1. repec:eee:rensus:v:78:y:2017:i:c:p:554-587 is not listed on IDEAS
    2. Ryu, Doojin & Yang, Heejin, 2017. "Price disagreements and adjustments in index derivatives markets," Economics Letters, Elsevier, vol. 151(C), pages 104-106.
    3. Moore, Megan & Cristofalo, Margaret & Dotolo, Danae & Torres, Nicole & Lahdya, Alexandra & Ho, Leyna & Vogel, Mia & Forrester, Mollie & Conley, Bonnie & Fouts, Susan, 2017. "When high pressure, system constraints, and a social justice mission collide: A socio-structural analysis of emergency department social work services," Social Science & Medicine, Elsevier, vol. 178(C), pages 104-114.

    More about this item

    Keywords

    Informed trading; Efficiency; Volatility;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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