IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v46y2016icp100-120.html
   My bibliography  Save this article

Asymmetric information, heterogeneous prior beliefs, and public information

Author

Listed:
  • Gong, Fuzhou
  • Liu, Hong

Abstract

We present a dynamic trading model that assumes traders face not only asymmetric information but also heterogeneous prior beliefs under a mandatory public disclosure requirement. We find that the overconfident insider chooses to trade in an alternating way in the sense that he underreacts to his information in the first period, overreacts in the second, underreacts in the third, overreacts in the fourth, and so on. The irrational insider trades in this way not only to dissimulate his information but also to equalize his profits across periods. The coexistence of public disclosure and heterogeneous prior beliefs leads to large and fluctuant trading volumes, and the more underconfident the insider is, the greater is the degree of fluctuation. Also, contrarian and momentum trading arise endogenously as a result of the insider's irrationality and the public disclosure. Finally, we present the economic explanation for our model by giving the Granger causality relationship between the amended price series and the insider's trading order series.

Suggested Citation

  • Gong, Fuzhou & Liu, Hong, 2016. "Asymmetric information, heterogeneous prior beliefs, and public information," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 100-120.
    • Handle: RePEc:eee:reveco:v:46:y:2016:i:c:p:100-120
    DOI: 10.1016/j.iref.2016.07.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056016300594
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2016.07.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
    2. Terrance Odean., 1996. "Volume, Volatility, Price and Profit When All Trader Are Above Average," Research Program in Finance Working Papers RPF-266, University of California at Berkeley.
    3. Jean-Charles Rochet & Jean-Luc Vila, 1994. "Insider Trading without Normality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 131-152.
    4. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. "Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-270, March.
    5. Zhang, Wei David, 2008. "Impact of outsiders and disclosed insider trades," Finance Research Letters, Elsevier, vol. 5(3), pages 137-145, September.
    6. Zhou, Deqing, 2012. "Overconfidence, public disclosure and long-lived information," Economics Letters, Elsevier, vol. 116(3), pages 626-630.
    7. Fei Ren & Wei-Xing Zhou, 2010. "Recurrence interval analysis of trading volumes," Papers 1002.1653, arXiv.org.
    8. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    10. Back, Kerry, 1992. "Insider Trading in Continuous Time," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
    11. Chen, Shiu-Sheng, 2012. "Revisiting the empirical linkages between stock returns and trading volume," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1781-1788.
    12. Kyle, Albert S & Wang, F Albert, 1997. "Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?," Journal of Finance, American Finance Association, vol. 52(5), pages 2073-2090, December.
    13. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 109-126, March.
    14. Fuzhou Gong & Deqing Zhou, 2010. "Insider Trading in the Market with Rational Expected Price," Papers 1012.2160, arXiv.org.
    15. Zhang, Wei David, 2004. "Risk aversion, public disclosure, and long-lived information," Economics Letters, Elsevier, vol. 85(3), pages 327-334, December.
    16. Huddart, Steven & Hughes, John S & Levine, Carolyn B, 2001. "Public Disclosure and Dissimulation of Insider Trades," Econometrica, Econometric Society, vol. 69(3), pages 665-681, May.
    17. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September.
    18. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 1-36, June.
    19. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    20. Albert Wang, F., 1998. "Strategic trading, asymmetric information and heterogeneous prior beliefs," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 321-352, September.
    21. Meir Statman & Steven Thorley & Keith Vorkink, 2006. "Investor Overconfidence and Trading Volume," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1531-1565.
    22. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    23. Holden, Craig W. & Subrahmanyam, Avanidhar, 1994. "Risk aversion, imperfect competition, and long-lived information," Economics Letters, Elsevier, vol. 44(1-2), pages 181-190.
    24. Terrance Odean, 1998. "Volume, Volatility, Price, and Profit When All Traders Are Above Average," Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
    25. Andersen, Torben G, 1996. "Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
    26. Foster, F Douglas & Viswanathan, S, 1996. "Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Linlang & Zhang, Zhe & Zhang, Peng & Wang, Xiongyuan, 2022. "Defend or remain quiet? Tax avoidance and the textual characteristics of the MD&A in annual reports," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 193-204.
    2. Li, Yanqiong & He, Jie & Xiao, Min, 2019. "Risk disclosure in annual reports and corporate investment efficiency," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 138-151.
    3. Ding, Jing & Fang, Libing & Chen, Shi, 2020. "Mitigating free riding in social networks: The impact of underestimating others’ ability in financial market," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 582-599.
    4. Jiang, Ying & Liu, Hong, 2022. "Insider trading, overconfidence, and private information flow," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhou, Deqing, 2013. "Irrational confidence, imperfect and long-lived information," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 383-405.
    2. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Du, Sarina & Liu, Hong, 2015. "The overconfident trader does not always overreact to his information," Economic Modelling, Elsevier, vol. 46(C), pages 384-390.
    4. Ramzi Boussaidi, 2022. "Implications of the overconfidence bias in presence of private information: Evidence from MENA stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3660-3678, July.
    5. Chuang, Wen-I & Lee, Bong-Soo, 2006. "An empirical evaluation of the overconfidence hypothesis," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.
    6. Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.
    7. Jiang, Ying & Liu, Hong, 2022. "Insider trading, overconfidence, and private information flow," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    8. Zhou, Deqing, 2015. "The virtue of overconfidence when you are not perfectly informed," Economic Modelling, Elsevier, vol. 47(C), pages 105-110.
    9. Kenneth Yung & Yen-Chih Liu, 2009. "Implications of futures trading volume: Hedgers versus speculators," Journal of Asset Management, Palgrave Macmillan, vol. 10(5), pages 318-337, December.
    10. Liu, Hong & Qi, Lina & Li, Zaili, 2019. "Insider trading, representativeness heuristic insider, and market regulation," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 48-64.
    11. Caballe, Jordi & Sakovics, Jozsef, 2003. "Speculating against an overconfident market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 199-225, April.
    12. Markus Glaser & Martin Weber, 2007. "Overconfidence and trading volume," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 1-36, June.
    13. repec:dau:papers:123456789/11681 is not listed on IDEAS
    14. Zhou, Deqing & Wang, Wenjie, 2020. "Insider, outsider and information heterogeneity," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    15. Elina Pradkhan, 2016. "Information Content of Trading Activity in Precious Metals Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 421-456, May.
    16. Diego García & Francesco Sangiorgi & Branko Urošević, 2007. "Overconfidence and Market Efficiency with Heterogeneous Agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 313-336, February.
    17. Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2014. "Irrational Market Makers," Finance, Presses universitaires de Grenoble, vol. 35(1), pages 107-145.
    18. Michailova, Julija, 2010. "Development of the overconfidence measurement instrument for the economic experiment," MPRA Paper 34799, University Library of Munich, Germany, revised Nov 2011.
    19. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    20. Jaya M. Prosad & Sujata Kapoor & Jhumur Sengupta & Saurav Roychoudhary, 2017. "Overconfidence and Disposition Effect in Indian Equity Market: An Empirical Evidence," Global Business Review, International Management Institute, vol. 19(5), pages 1303-1321, October.
    21. Wen-I Chuang & Bong-Soo Lee & Kai-Li Wang, 2014. "US and Domestic Market Gains and Asian Investors’ Overconfident Trading Behavior," Financial Management, Financial Management Association International, vol. 43(1), pages 113-148, March.

    More about this item

    Keywords

    Public disclosure; Insider trading; Price discovery; Heterogeneous prior beliefs; Granger causality;
    All these keywords.

    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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:46:y:2016:i:c:p:100-120. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.