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Information provision in financial markets

Author

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  • Moez Bennouri

    ()

  • C. Clark

    ()

  • Jacques Robert

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Abstract

We set up a rational expectations model in which investors trade a risky asset based on a private signal they receive about the quality of the asset, and a public signal that represents a noisy aggregation of the private signals of all investors. Our model allows us to examine what happens to market performance (market depth, price efficiency, volume of trade, and expected welfare) when regulators can induce improved information provision in one of two ways. Regulations can be designed that either provide investors with more accurate information by improving the quality of prior information, or that enhance the transparency of the market by improving the quality of the public signal. In our rational expectations equilibrium, improving the quality of the public signal can be interpreted as a way of providing information about the anticipations and trading motives of all market participants. We find that both alternatives improve market depth. However, in the limit, we show that improving the precision of prior information is a more efficient way to do so. More accurate prior information decreases asymmetric information problems and consequently reduces the informativeness of prices, while a more accurate public signal increases price informativeness. The volume of trade is independent of the quality of prior information and is increasing in the quality of the public signal. Finally, expected welfare can sometimes fall as prior information or the public signal become more precise.
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Suggested Citation

  • Moez Bennouri & C. Clark & Jacques Robert, 2010. "Information provision in financial markets," Annals of Finance, Springer, vol. 6(2), pages 255-286, March.
  • Handle: RePEc:kap:annfin:v:6:y:2010:i:2:p:255-286
    DOI: 10.1007/s10436-009-0119-9
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    References listed on IDEAS

    as
    1. Flood, Mark D, et al, 1999. "Quote Disclosure and Price Discovery in Multiple-Dealer Financial Markets," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 37-59.
    2. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
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    5. Lars E. O. Svensson, 2006. "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review, American Economic Association, vol. 96(1), pages 448-452, March.
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    7. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.
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    13. Gemmill, Gordon, 1996. " Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange under Different Publication Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1765-1790, December.
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    Citations

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    Cited by:

    1. Joel Vanden, 2015. "Noisy information and the size effect in stock returns," Annals of Finance, Springer, vol. 11(1), pages 77-107, February.
    2. Diana Muresan, 2012. "Retrospective Of Financial Reporting On Capital Market," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(14), pages 1-8.

    More about this item

    Keywords

    Information; Rational expectations; Market performance; D8; D43; G28;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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