Price and Volume Reactions to Public Information Releases: An Experimental Approach Incorporating Traders' Subjective Beliefs*

This paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long-lived financial asset. The objective is to study deviations from the symmetric information risk-neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double-auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash-motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices under-reacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. Forty-three percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double-auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short-term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.     

Bubbles and experience: An experiment with a steady inflow of new traders

We revisit the effect of traders' experience on price bubbles by introducing either one‐third or two‐thirds steady inflow of new traders in each of four consecutive experimental asset markets. We find that bubbles are still reduced in the treatments with a steady inflow of new traders, but at a slower pace compared to the baseline treatment in which new traders are only introduced in the last market. Our analysis of individual trading behavior shows that the slower abatement of bubbles in the inflow treatments can be attributed mainly to the inexperienced traders who make more mistakes than experienced traders.     

证券市场信息反馈理论浅析

本文借助Glosten/Milgrom(1985)的信息模型来分析在证券市场存在非对称信息的情况下,做市商为避免在和知情交易者进行交易时由于信息的不完整性时产生损失,而确立一个股票买卖价格的差额。做市商通过观察交易者的交易委托类型,借助贝叶斯定理来学习信息的反馈,而股票的真正价值会随着交易过程的延续最终体现在股票的价格中。该模型的研究为我国做市商制度的发展和完善提供了必要的理论依据。     

考虑有限关注的多个信息交易者竞争交易分析

文章假设在一个具有唯一风险资产的金融市场中，存在多个风险中性的信息交易者、很多噪音交易者、风险中性的做市商三类交易者，其中信息交易者是有限关注的，他们通过权衡关注和竞争两种因素选择交易量。文章首先建立了信息交易者具有不同关注度的一般模型，然后建立了具有相同关注度的模型，通过求解唯一线性均衡，推导它的均衡特征，得出结论：信息交易者的交易强度、期望收益随着其他信息交易者关注度和信息交易者数量的增大而降低，随着自身的关注度的增大而增大；信息交易者数量较少时，期望收益随着信息交易者关注度的增大而增大；而信息交易者数量较多时，期望收益随着信息交易者关注度的增大起初快速增大，然后缓慢降低。     

Experience and Confidence in an Internet‐Based Asset Market Experiment

The experience effect in asset markets is one that was thought to be settled. As subjects gained experience with the interface and each other, they typically exhibit fewer instances of mispricing and at lower magnitudes. But questions regarding trading experience are not easy to address in the lab with the typical subject pool since the kind of experience one can typically generate in the lab is experience with the experimental environment itself—not with external environments. However, in virtual worlds asset markets are highly evolved, providing a subject pool with skilled and experienced traders that can be accessed via the Internet. This study compares experimental asset markets with participants recruited from virtual world trading groups to experimental markets with participants recruited from the virtual world at large. I further examine trader performance and trading behavior within markets. The findings indicate that asset markets with virtual world participants recruited from trading groups are more prone to exhibit bubbles than are markets with virtual world participants recruited at large. Within condition, experienced traders are less likely to follow fundamentals and more likely to engage in strategies that result in loss of earnings. Excess confidence is rejected as an explanation for this pattern, as confidence is found to be related to higher earnings and fundamental value trading strategies.     

Option Trading,Price Discovery,and Earnings News Dissemination*

Abstract. Option market activity increases by more than 10 percent in the four days before quarterly earnings announcements. We show that the direction of this preannouncement trading foreshadows subsequent earnings news. Specifically, we find option traders initiate a greater proportion of long (short) positions immediately before “good” (“bad”) earnings news. Midquote returns to active-side option trades are positive during nonannouncement periods and are significantly higher immediately prior to earnings announcements. Bid-ask spreads for options widen during the announcement period, but traders do not gravitate toward high delta contracts. Collectively, the evidence shows option traders participate generally in price discovery (the incorporation of private information in price), and more specifically in the dissemination of earnings news.     

Trade-size clustering and price efficiency

Using a sample of 26 markets, this paper investigates if trade-size clustering affects price efficiency. Our results suggest that more clustering trades are associated with greater resemblance of a random walk, less pricing errors, and shorter price delays. Moreover, we examine three underlying mechanisms to explain how clustering improves efficiency. First, we show that clustering trades are informative, consistent with the idea that stealth traders leverage such tactics to convey private information to prices. Second, we discover that clustering trades are positively related to investor attention (stock liquidity), implying that informed clustering trades happen at the presence of enormous uninformed investors. High attention and liquid markets help reduce the trading friction, thereby prompting quick price adjustments to private information released by the stealth trading.     

控制权转移中的信息泄露：市场微观结构的分析视角

本文从市场微结构的视角,利用上市公司的高频分笔交易数据,以控制权转移事件中的目标公司为研究对象,分析宣告日前目标公司是否存在信息泄露的现象。本文的研究发现宣告日前后的买卖价差、交易量等指标显著提高,同时在宣告日前的事件窗口中,买卖价差与交易量之间显著正相关,证实了在控制权转移事件中,宣告日前确实存在着信息泄露。此外本文的研究表明不能以股价的上涨作为判断信息泄露的标志。     

噪声交易与股票流动性:兼对“正(负)相关”理论的评析及“流动性黑洞”现象的解释

噪声交易与股票流动性都是行为金融研究的重点，但二者的相关性问题学界一直未能达成一致，"正负之争"不休。文章改进Kyle （1985）的假设，构建符合中国实际的流动性数理模型，模型表明：噪声交易与流动性负相关，且相关关系受信息不对称、风险厌恶度等因素的影响。进一步，文章以中国沪深300指数的成分股数据证实了"噪声交易-流动性"关系，发现其存在显著的月历效应和市场行情效应。文章对"正（负）相关"理论进行了梳理和评析，为争论的清晰化、明朗化做出贡献。     

Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price*

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning‐from‐price effect amplifies the impact of public disclosure on price efficiency.     

An experimental investigation of bilateral oligopoly in emissions trading markets

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union's Emissions Trading Scheme (ETS), can be dominated by relatively few large sellers or buyers. Previous studies on market power in emissions trading have assumed the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers. Using a laboratory experiment, our objective in this paper is to test the performance of an emissions trading market utilizing a double auction in a bilateral oligopoly. Our results suggest that the theoretical bilateral oligopoly models can better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by the theoretical bilateral oligopoly model. How market power is exercised depends on the curvature of the abatement cost function. If the marginal abatement cost function of buyers (sellers) is less steep than that of sellers (buyers), the price of permits is lower (higher) than that under perfect competition. This is because the market power of buyers (sellers) exceeds that of sellers (buyers). The price of permits is close to the perfect competitive price when all traders have the sameslope of the marginal abatement cost function.     

Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market

Abstract

A vector autoregression (VAR) is estimated on tick-by-tick data for quote-changes and signed trades of 2-year, 5-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.     

Shadow banking activities of non-financial companies and the information content of stock prices

In recent years, corporate investment rate has been declining, and they have been allocating financial capital to the shadow credit market, which lead to accumulation of financial risks. Based on the annual data of non-financial listed companies from 2007 to 2019, this paper explores the impact of non-financial companies’ shadow banking on the information content of stock prices. Results show that shadow banking of non-financial enterprises reduce the information content of stock price, and the above effects are more significant in regions with lower social trust and higher policy uncertainty, private enterprises, and enterprises without political connection. Enterprises engage in shadow banking can impact idiosyncratic information content of stock price through channels of earning management, irrational investor behavior, creditor risk concerns and informed trading; Analysts over-optimism and insider trading can also have an impact on the relationship between shadow banking activities and synchronization of stock price. This paper analyzes economic consequences of non-financial enterprises’ shadow banking activities, thus providing important theoretical support and policy guidance for enhancing signal mechanism of securities market, improving capital market efficiency of resource allocation, deepening financial market-oriented reforms.     

Can price limits help when the price is falling? Evidence from transactions data on the Shanghai Stock Exchange

We use transactions data to explore the magnet effects of price limit rules on the Shanghai Stock Exchange (SHSE). When limit hits are imminent, stock prices are found to approach the price limits at faster rates, with higher trading intensity and larger price variation, supporting the magnet effect hypothesis of Subrahmanyam [Subrahmanyam, A., 1994. Circuit breakers and market volatility: A theoretical perspective. Journal of Finance, 49, 237–254.]. Moreover, when stock prices approach the floor limits, we observe lower than normal market conditions’ trading volume and trade size but a wider spread. The panic selling psychology of individual investors for fear of illiquidity and the strategic trading decisions of discretionary traders during periods prior to price limit hits at the floors are conjectured as possible explanations for the observed price behaviors. Post-limit-hit analysis reveals evidence of delayed price discovery at the ceiling limit but price reversal at the floor.     

Boundaries of the Tournament Pricing Effect in Asset Markets: Evidence from Experimental Markets

Tournament compensation of asset traders has been shown to promote deconvergence from intrinsic value pricing in an experimental asset market where all traders are so compensated (James and Isaac 2000). This paper explores the extent of this effect as experimental design parameters—proportion of traders facing tournament compensation, details of the tournament contract, and time horizon of the asset being traded—are varied. We find that the original results are replicated using the original parameters, that a tournament contract modified to provide a penalty for underperformance does not necessarily eliminate the effect, and that reducing the proportion of traders facing tournament compensation to half the market largely eliminates the effect.     

The bubble game: A classroom experiment

We propose a simple classroom experiment on speculative bubbles: the Bubble Game. This game is useful to discuss about market efficiency and trading strategies in a financial economics course, and about behavioral aspects in a game theory course, at all levels. The Bubble Game can be played with any number of students, as long as this number is strictly greater than one. Students sequentially trade an asset which is publicly known to have a fundamental value of zero. If there is no cap on asset prices, speculative bubbles can arise at the Nash equilibrium because no trader is ever sure to be last in the market sequence. Otherwise, the Nash equilibrium involves no trade. Bubbles usually occur with or without a cap on prices. Traders who are less likely to be last and have less steps of reasoning to perform to reach equilibrium are in general more likely to speculate.     

Commodity option pricing efficiency before Black,Scholes, and Merton

It is often thought that the arrival of the Black–Scholes–Merton (BSM) model of option pricing in the early 1970s allowed traders to understand how to price and value options with greater precision. However, our study suggests that interwar commodity options traders may have been able to intuit ‘fair’ value and to adjust their prices to changes in the market environment well before the advent of this innovative model. A scarcity of historical price data has limited empirical tests of option price efficiency well before BSM to studies of stock options in the 1870s and the early twentieth century which revealed contrasting findings. This study deals with option pricing in a different market—commodities—during the interwar period. We conclude that option prices were closer to their BSM theoretical values than prior studies suggest. Institutional differences between interwar commodity options markets and stock options markets in the 1870s and the early twentieth century may partly account for this result. Furthermore, we find that interwar option prices were no more mispriced than in modern times, and were as sensitive to changes in volatility—the key valuation parameter in the BSM model.     

Foreign exchange market intervention and price discovery

This paper studies the role of foreign exchange market intervention in the price discovery process of the USD–JPY market. Using the tick-by-tick bid and ask quotes from the Electronic Broking Services (EBS), we find that Japanese official intervention affects the relative contributions of bid and ask quotes to price discovery of the USD–JPY exchange rate. The empirical results show that bid quotes usually respond to information more promptly than ask quotes, as measured by information share on a daily basis. The asymmetry in price-discovery efficacy of bid and ask quotes, however, declines in magnitude on days in which Japanese monetary authorities intervene in the USD–JPY market.     

Nonlinear and time-varying risk premia

Facing the puzzling risk-return trade-off, this paper proposes a new model for risk premia to capture nonlinear and time-varying features under the influence of trading volume. Using high-frequency data for the US stock market in Wharton Research Data Services' Trade and Quote database, our empirical findings suggest a significant nonlinear and time-varying contemporary relationship between return and realized volatility, ranging from positive to negative with an up-down-up pattern, summarized as follows. First, the contemporary relationship is positive on inactive trading days when the trading volume is smaller than usual, in which case traders may face no new information or event uncertainty. Second, the relationship is significantly negative when the trading volume is large on active trading days, in which case traders may be overconfident and behave in a risk-seeking fashion. Third, the risk premium tends toward zero during extremely abnormal trading days. Finally, low and high levels of trading volume have asymmetrical influences on risk premia, with a larger absolute value of risk premia for high levels of trading volume. Furthermore, the nonlinear changing autocorrelation of returns is insignificant from zero on normal trading days and most likely different from zero on abnormal trading days. These results provide explanations for the conflicts between financial theoretic and empirical studies.     

Allocative Efficiency of Agrifood Traders: Shrimp Traders in Indonesia

Shrimp is one of Indonesia's most important agricultural export commodities, with an annual export value exceeding $1 billion. If this high-value sector is to remain competitive and continue to grow, rural traders must be able to efficiently allocate scarce labour and factor inputs to trade shrimp. This study tests for factors leading to allocative inefficiency in the shrimp trade, by estimating a stochastic cost frontier on the basis of data from a survey of 200 shrimp traders in Central Java and South Sulawesi. Our results show that larger firms have a distinct cost advantage in trade and, owing in part to greater access to factor markets, are more efficient in allocating factors. Small firms can improve their allocative efficiency and become more competitive by specialising in trading one shrimp variety and by using output contracts to mitigate risk in the output market.