Uncertainty about what is in the price

A critical question facing speculators contemplating to trade on private information is whether their signal has already been priced in by the market. In our model, speculators assess the novelty of their information based on recent price movements, and market makers are aware that speculators might...

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Bibliographic Details
Published in:Journal of financial economics 2024-11, Vol.161, p.103915, Article 103915
Main Authors: Peress, Joël, Schmidt, Daniel
Format: Article
Language:English
Subjects:
Learning from prices
Price impact
Strategic trading
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Summary:A critical question facing speculators contemplating to trade on private information is whether their signal has already been priced in by the market. In our model, speculators assess the novelty of their information based on recent price movements, and market makers are aware that speculators might be trading on stale news. An asymmetric response to past price movements ensues: after price increases, buy volume – because it may result from stale news trading – has a lower price impact than sell volume (and vice versa after price decreases). Consequently, return skewness is negatively related to lagged returns. We find strong support for these and other predictions using a comprehensive sample of US stocks.
ISSN:0304-405X
DOI:10.1016/j.jfineco.2024.103915