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Hierarchical Information and the Rate of Information Diffusion

Author

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  • Yi Xue

    (Department of Economics, Simon Fraser University)

  • Ramazan Gencay

    (Department of Economics, Simon Fraser University)

Abstract

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.

Suggested Citation

  • Yi Xue & Ramazan Gencay, 2009. "Hierarchical Information and the Rate of Information Diffusion," Working Paper series 29_09, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:29_09
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    Cited by:

    1. Goodman, James, 2014. "Evidence for ecological learning and domain specificity in rational asset pricing and market efficiency," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 48(C), pages 27-39.
    2. Niu, Zibo & Demirer, Riza & Suleman, Muhammad Tahir & Zhang, Hongwei & Zhu, Xuehong, 2024. "Do industries predict stock market volatility? Evidence from machine learning models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).

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    More about this item

    Keywords

    Information hierarchies; Information diffusion rate; Momentum;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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