Uncertainty about What’s in the Price
Abstract
Speculators face uncertainty about which signals are already reflected in the
price. We present a model in which speculators update the probability that their
information is truly novel rather than stale based on recent price movements and
market makers are aware that speculators may be trading on stale news. The
model predicts an asymmetric price response to past price movements: after a
recent price increase, buy volume because it may result from speculators trading
on stale news has a lower price impact than sell volume (and vice versa after a
recent price decrease). Using a comprehensive sample of order flow imbalances
and price impact costs, we find strong support for this prediction.
Zoom link:
https://eur-nl.zoom.us/j/96066497756?pwd=SDgrdHp4WU14aUVGbFgyQzBVS2dhQT09
Meeting ID: 960 6649 7756
