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Hierarchical Information and the Rate of Information Diffusion

  • Yi Xue

    ()

    ( Department of Economics, Simon Fraser University)

  • Ramazan Gencay

    ()

    ( Department of Economics, Simon Fraser University)

The rate of information diffusion and consequently price discovery, is conditional upon not only the design of the market microstructure, but also the informational structure. This paper presents a market microstructure model showing that an increasing number of information hierarchies among informed competitive traders leads to a slower information diffusion rate and informational inefficiency. The model illustrates that informed traders may prefer trading with each other rather than with noise traders in the presence of the information hierarchies. Furthermore, we show that momentum can be generated from the predictable patterns of noise traders, which are assumed to be a function of past prices

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 29_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:29_09
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