A model of information diffusion with asymmetry and confidence effects in financial markets |
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| Institution: | 1. Institute of Financial Studies, Southwestern University of Finance and Economics, Chengdu, China;2. UTS Business School, University of Technology Sydney, PO Box 123, Broadway, NSW 2007, Australia;3. School of Management, Queen’s University Belfast, Belfast, UK;1. School of Business, The University of Western Sydney, Locked Bag 1797, Penrith, NSW 2751, Australia;2. Newcastle Business School, The University of Newcastle, Callaghan, NSW 2300, Australia |
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| Abstract: | We present a model of multi-period continuous information diffusion in financial markets. We show that price and trading volume exhibit asymmetric term structures to information flow, where the diffusion rate accelerates more slowly at short horizons than it decelerates at long horizons. Bounded rationality is modelled by an endogenous trader confidence index which declines as stock price information becomes noisier, where lower confidence translates into lower trading volume and slower price accretion. Information diffusion slows and asymmetries are accentuated as traders lose confidence in information accuracy. Our empirical findings support the model's predictions of asymmetric momentum patterns and confidence effects. |
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| Keywords: | Asymmetrical information diffusion Confidence effects Momentum Financial markets G11 G12 G40 |
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