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Catching falling knives: speculating on market overreaction


  • Colliard, Jean-Edouard


Market participants often invest in order to acquire information that pertains to the market itself (e.g. order flow) rather than to fundamentals. This enables them to infer more information from past trades. I show that agents trading on such information, typically high-frequency traders, decrease the likelihood of short-lived mispricings by trading against price pressure. In the long-run however, such countervailing speculation amounts to signal-jamming, slowing down price discovery. These traders insure the market against short-run crashes by "catching falling knives". Higher adverse selection and slower convergence form the "premium" paid by other market participants. JEL Classification: D82, G0, G12, G14

Suggested Citation

  • Colliard, Jean-Edouard, 2013. "Catching falling knives: speculating on market overreaction," Working Paper Series 1545, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131545

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    References listed on IDEAS

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    Cited by:

    1. Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2013. "High frequency trading and price discovery," Working Paper Series 1602, European Central Bank.

    More about this item


    high-frequency trading; market crashes; speculation; supply information;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G0 - Financial Economics - - General
    • 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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