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Informed trading, market efficiency and volatility

Author

Listed:
  • 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. 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.
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    3. 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.
    4. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
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    6. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. David Johnstone, 2016. "The Effect of Information on Uncertainty and the Cost of Capital," Contemporary Accounting Research, John Wiley & Sons, vol. 33(2), pages 752-774, June.
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    Citations

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    Cited by:

    1. Dave Cliff, 2021. "BBE: Simulating the Microstructural Dynamics of an In-Play Betting Exchange via Agent-Based Modelling," Papers 2105.08310, arXiv.org.
    2. Chung, Kee H. & Chuwonganant, Chairat, 2023. "COVID-19 pandemic and the stock market: Liquidity, price efficiency, and trading," Journal of Financial Markets, Elsevier, vol. 64(C).
    3. Zhao, Wandi & Gao, Yang, 2023. "Network connectedness and the contagion structure of informed trading: Evidence from the time and frequency domains," International Review of Financial Analysis, Elsevier, vol. 90(C).
    4. Ryu, Doojin & Yang, Heejin, 2017. "Price disagreements and adjustments in index derivatives markets," Economics Letters, Elsevier, vol. 151(C), pages 104-106.
    5. Kee H. Chung & Chairat Chuwonganant, 2023. "Tick size and price efficiency: Further evidence from the Tick Size Pilot Program," Financial Management, Financial Management Association International, vol. 52(3), pages 483-511, September.
    6. Yayun Shen & Michael Faure, 0. "Green building in China," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 0, pages 1-17.
    7. Tadgh Hegarty, 2021. "Information and price efficiency in the absence of home crowd advantage," Applied Economics Letters, Taylor & Francis Journals, vol. 28(21), pages 1902-1907, December.
    8. Kumar, Manish & Kumar, Arun, 2017. "Performance assessment and degradation analysis of solar photovoltaic technologies: A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 78(C), pages 554-587.
    9. 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.

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    Keywords

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    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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