Velocity of Information in Efficient Markets: A Theory of Market Value Change

This article argues that market prices in contemporary financial markets are driven by the value of information multiplied by a factor of the information's velocity. These factors combined have the potential to explain several observed market phenomenon, including market volatility during econo...

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Bibliographic Details
Published in:Journal of Investing 2012-10, Vol.21 (3), p.55-59
Main Author: Bell, Holly A.
Format: Article
Language:English
Subjects:
Algorithms
Annual reports
Capital assets
Efficiency
Efficient markets
Electronic trading systems
High frequency trading
Macroeconomics
Market prices
Market value
Noise
Regulation of financial institutions
Securities markets
Studies
Velocity
Volatility
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Summary:This article argues that market prices in contemporary financial markets are driven by the value of information multiplied by a factor of the information's velocity. These factors combined have the potential to explain several observed market phenomenon, including market volatility during economic crisis or recession, market bubbles, flash crashes, and short-run volatility combined with overreactions and over-corrections. The theory considers both micro and macroeconomic information, and questions the assumption that market prices always reflect intrinsic value alone. While microeconomic information is helpful in determining a security's intrinsic value relative to other securities, macroeconomic information impacts the aggregate market. The result of our contemporary high-velocity information environment suggests our financial markets are becoming informationally hyperefficient and quasi-rational. This hyperefficiency has the potential to create short-run volatility on a scale not previously experienced. [PUBLICATION ABSTRACT]
ISSN:1068-0896
2168-8613
DOI:10.3905/joi.2012.21.3.055