Clustering on the same news sources in an asset market

Larson, Nathan (2011): Clustering on the same news sources in an asset market.

Abstract

We study the incentives to acquire information from exclusive news sources versus information from popular sources in a CARA-normal asset market. Each trader is able to observe one of a finite number of news sources. Clustering on the most precise source can happen for two reasons. One is standard: traders do not care that they dilute others’ profits by trading on the same information. The other reason is more novel: traders with different information sets may respond to the same news differently — when this is so, they can benefit by coordinating their attention on the same news source in order to take opposite sides of the market. News from such a source will generate abnormal volume that need not be accompanied by large price movement. Furthermore, we show that as the number of sources grows, traders concentrate their attention on a few of the best ones, leaving most information unexploited.

• Item Type: MPRA Paper
• Language: English
• Keywords: information acquisition; herding; abnormal volume; market order; limit order
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

References

[1] Anat R. Admati and Paul Pfleiderer. A monopolistic market for information. Journal of Economic Theory, 39(2):400 . 438, 1986.

[2] Anat R. Admati and Paul Pfleiderer. Viable allocations of information in financial markets. Journal of Economic Theory, 43(1):76 . 115, 1987.

[3] Rowland Atiase and Linda Bamber. Trading volume reactions to annual earnings announcements: The incremental role of information asymmetry. Journal Of Accounting And Economics, pages 309.329, 1994.

[4] Linda Smith Bamber. The information content of annual earnings releases: A trading volume approach. Journal of Accounting Research, 24(1):pp. 40.56, 1986.

[5] Linda Smith Bamber, Orie E. Barron, and Douglas E. Stevens. Trading volume around earnings announcements and other financial reports: Theory, research design, empirical evidence, and directions for future research. Contemporary Accounting Research, 28(2):431.471, 2011.

[6] Kim C. Border. Fixed point theorems with applications to economics and game theory. Cambridge University Press, 1985.

[7] Sugato Chakravarty and Craig W. Holden. An integrated model of market and limit orders. Journal of Financial Intermediation, 4(3):213 . 241, 1995.

[8] Douglas W. Diamond and Robert E. Verrecchia. Information aggregation in a noisy rational expectations economy. Journal of Financial Economics, 9(3):221 . 235, 1981.

[9] Daniel Dorn and Gunter Strobl. Rational disposition effects: Theory and evidence. Working Paper, 2010.

[10] Lily H. Fang and Ayako Yasuda. Are stars�f opinions worth more? the relation between analyst reputation and recommendation values. SSRN eLibrary, 2010.

[11] Kenneth A. Froot, David S. Scharfstein, and Jeremy C. Stein. Herd on the street: Informational inefficiencies in a market with short-term speculation. The Journal of Finance, 47(4):pp. 1461.1484, 1992.

[12] Jayant Vivek Ganguli and Liyan Yang. Complementarities, multiplicity, and supply information. Journal of the European Economic Association, 7(1):90.115, 2009.

[13] Diego Garcia and Gunter Strobl. Relative wealth concerns and complementarities in information acquisition. Review of Financial Studies, 24(1):169.207, 2011.

[14] Diego Garcia and Branko Urosevic. Noise and aggregation of information in large markets. Working Paper, 2010.

[15] Diego Garcia and Joel M. Vanden. Information acquisition and mutual funds. Journal of Economic Theory, 144(5):1965 . 1995, 2009.

[16] Lawrence R. Glosten. Is the Electronic Open Limit Order Book Inevitable? The Journal of Finance, 49(4):1127.1161, 1994.

[17] Ronald L. Goettler, Christine A. Parlour, and Uday Rajan. Equilibrium in a dynamic limit order market. The Journal of Finance, 60(5):2149.2192, 2005.

[18] Sanford J. Grossman and Joseph E. Stiglitz. On the impossibility of informationally efficient markets. The American Economic Review, 70(3):pp. 393.408, 1980.

[19] Bruce D. Grundy and Maureen McNichols. Trade and the revelation of information through prices and direct disclosure. The Review of Financial Studies, 2(4):pp. 495.526, 1989.

[20] Puneet Handa and Robert A. Schwartz. Limit order trading. The Journal of Finance, 51(5):pp. 1835. 1861, 1996.

[21] Christian Hellwig and Laura Veldkamp. Knowing what others know: Coordination motives in information acquisition. The Review of Economic Studies, 76(1):223.251, 2009.

[22] Martin F. Hellwig. On the aggregation of information in competitive markets. Journal of Economic Theory, 22(3):477 . 498, 1980.

[23] Eugene Kandel and Neil D. Pearson. Differential interpretation of public signals and trade in speculative markets. Journal of Political Economy, 103(4):pp. 831.872, 1995.

[24] Oliver Kim and Robert E. Verrecchia. Trading volume and price reactions to public announcements. Journal of Accounting Research, 29(2):pp. 302.321, 1991.

[25] Oliver Kim and Robert E. Verrecchia. Market liquidity and volume around earnings announcements. Journal of Accounting and Economics, 17(1-2):41 . 67, 1994.

[26] Oliver Kim and Robert E. Verrecchia. Pre-announcement and event-period private information. Journal of Accounting and Economics, 24(3):395 . 419, 1997.

[27] Albert S. Kyle. Continuous auctions and insider trading. Econometrica, 53(6):pp. 1315.1335, 1985.

[28] Albert S. Kyle. Informed speculation with imperfect competition. The Review of Economic Studies, 56(3):317.355, 1989.

[29] Roger K. Loh and Rene M. Stulz. When are analyst recommendation changes influential? Review of Financial Studies, 24(2):593.627, 2011.

[30] Carolina Manzano and Xavier Vives. Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity. Journal of Mathematical Economics, In Press, Corrected Proof:., 2011.

[31] Mark L. Mitchell and J. Harold Mulherin. The impact of public information on the stock market. The Journal of Finance, 49(3):pp. 923.950, 1994.

[32] Chul W. Park and Earl K. Stice. Analyst forecasting ability and the stock price reaction to forecast revisions. Review of Accounting Studies, 5:259.272, 2000. 10.1023/A:1009668711298.

[33] Earl K. Stice. The market reaction to 10-k and 10-q filings and to subsequent the wall street journal earnings announcements. The Accounting Review, 66(1):pp. 42.55, 1991.

[34] Scott E. Stickel. Reputation and performance among security analysts. The Journal of Finance, 47(5):pp. 1811.1836, 1992.

[35] Scott E. Stickel. The anatomy of the performance of buy and sell recommendations. Financial Analysts Journal, 51(5):pp. 25.39, 1995.

[36] Stijn Van Nieuwerburgh and Laura Veldkamp. Information immobility and the home bias puzzle. The Journal of Finance, 64(3):1187.1215, 2009.

[37] Laura L. Veldkamp. Media frenzies in markets for financial information. The American Economic Review, 96(3):pp. 577.601, 2006.

[38] Robert E. Verrecchia. Information acquisition in a noisy rational expectations economy. Econometrica, 50(6):pp. 1415.1430, 1982.

[39] X Vives. Short-term investment and the informational efficiency of the market. Review of Financial Studies, 8(1):125.160, 1995.

[40] Xavier Vives. The speed of information revelation in a financial market mechanism. Journal of Economic Theory, 67(1):178 . 204, 1995.

[41] Kent L. Womack. Do brokerage analysts�f recommendations have investment value? The Journal of Finance, 51(1):pp. 137.167, 1996.