False News, Informational Efficiency, and Price Reversals
Dugast, Jérôme; Foucault, Thierry (2014), False News, Informational Efficiency, and Price Reversals, VU Amsterdam Finance Seminar, 2014-11, Amsterdam, Netherlands
TypeCommunication / Conférence
Conference titleVU Amsterdam Finance Seminar
MetadataShow full item record
Dauphine Recherches en Management [DRM]
Groupement de Recherche et d'Etudes en Gestion à HEC [GREGH]
Abstract (EN)Speculators can discover whether a signal is true or false by processing it but thistakes time. Hence they face a trade-off between trading fast on a signal (i.e., beforeprocessing it), at the risk of trading on a false positive, or trading after processingthe signal, at the risk that prices already reflect their information. The number ofspeculators who choose to trade fast increases with news reliability and decreaseswith the cost of fast trading technologies. We derive testable implications for theeffects of these variables on (i) the value of information, (ii) patterns in returnsand trades, (iii) the frequency of price reversals in a stock, and (iv) informationalefficiency. Cheaper fast trading technologies simultaneously raise informationalefficiency and the frequency of ”mini-flash crashes”: large price movements thatrevert quickly.
Subjects / KeywordsHigh-Frequency Trading; Mini-Flash Crashes
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