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Information Acquisition in Ostensibly Efficient Markets

  • Alasdair Brown

    (University of East Anglia)

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    I use U.K. betting exchange data on Wimbledon tennis matches to investigate the Grossman and Stiglitz (1980) paradox. Risk-free arbitrage opportunities arise frequently during matches (as information arrives and asynchronously shifts prices), but seldom arise before matches (when there is little information to move prices). I find that on the few occasions that arbitrage opportunities do arise before matches, they last substantially longer than average. This suggests, in line with the paradox, that traders neglect to acquire information (i.e. carry out research, or watch markets) if they believe that markets are already efficient. This neglect, in turn, makes markets inefficient.

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    Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia School of Economics Working Paper Series with number 043.

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    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:uea:aepppr:2012_43
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    1. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers 03-025, Stanford Institute for Economic Policy Research.
    2. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    3. Denis Gromb & Dimitri Vayanos, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," LSE Research Online Documents on Economics 448, London School of Economics and Political Science, LSE Library.
    4. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
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    6. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    7. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, 04.
    8. Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers 176, Institute for Empirical Research in Economics - University of Zurich.
    9. Hirshleifer, David & Lim, Sonya Seongyeon & Teoh, Siew Hong, 2006. "Driven to distraction: Extraneous events and underreaction to earnings news," MPRA Paper 3110, University Library of Munich, Germany, revised 16 Apr 2007.
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    11. Kenneth Oliven & Thomas A. Rietz, 2004. "Suckers Are Born but Markets Are Made: Individual Rationality, Arbitrage, and Market Efficiency on an Electronic Futures Market," Management Science, INFORMS, vol. 50(3), pages 336-351, March.
    12. Hausch, Donald B & Ziemba, William T, 1990. "Arbitrage Strategies for Cross-Track Betting on Major Horse Races," The Journal of Business, University of Chicago Press, vol. 63(1), pages 61-78, January.
    13. Karen Croxson & J. James Reade, 2014. "Information and Efficiency: Goal Arrival in Soccer Betting," Economic Journal, Royal Economic Society, vol. 124(575), pages 62-91, 03.
    14. Henock Louis & Amy Sun, 2010. "Investor Inattention and the Market Reaction to Merger Announcements," Management Science, INFORMS, vol. 56(10), pages 1781-1793, October.
    15. Marshall, Ben R., 2009. "How quickly is temporary market inefficiency removed?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 917-930, August.
    16. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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