Abstract
This article develops an agent-based model of security market pricing process, capable to capture main stylised facts. It features a collective market pricing mechanism based upon evolving heterogenous expectations that incorporate signals of security issuer fundamental performance over time. Distinctive signaling sources on this performance correspond to institutional mechanisms of information diffusion. These sources differ by duration (temporary, persistent, and permanent), confidence, and diffusion degree among investors over space and time. Under full and immediate diffusion and balanced reaction by all the investors, the value of these sources should be consistently and timely integrated by the market price process, implying efficient pricing. By relaxing these quite heroic conditions, we assess the impact of distinctive information sources over market price dynamics, through financial systemic properties such as market price volatility, exuberance and errancy, as well as market liquidity. Our simulation analysis shows that transient information shocks can have permanent effects through mismatching reactions and self-reinforcing feedbacks, involving mispricing in both value and timing relative to the efficient market price series. This mispricing depends on both the information diffusion process and the ongoing information confidence mood among investors over space and time. We illustrate our results through paradigmatic cases of stochastic news, before generalising them to autocorrelated news. Our results are further corroborated by robustness checks over the parameter space.
Highlights
Introduction and Literature ReviewFinancial students and regulators currently share the notion that an informationally efficient financial market does fully, correctly and timely integrate any new (i.e. unexpected) information that affects the fundamental value of traded security into its price
Introduction and Literature ReviewFinancial students and regulators currently share the notion that an informationally efficient financial market does fully, correctly and timely integrate any new information that affects the fundamental value of traded security into its price
Our simulation analysis shows that transient information shocks can have permanent effects through mismatching reactions and self-reinforcing feedbacks, involving mispricing in both value and timing relative to the efficient market price series
Summary
Financial students and regulators currently share the notion that an informationally efficient financial market does fully, correctly and timely integrate any new (i.e. unexpected) information that affects the fundamental value of traded security into its price. Our simulation analysis shows that transient information shocks can have persistent (exuberance) and permanent (errancy) effects through mismatching reactions and self-reinforcing feedbacks, involving mispricing in both value content and timing relative to the informationally efficient market price series Speaking, this mispricing depends on both the information diffusion process and the ongoing information confidence mood among investors over space and time. Concerning time window for autocorrelated informational news patterns, the shock Nt is activated at period t = 10 and disappears at period t = 290, while the market price formation lasts between 1 and 300 as in the previous case This latter case allows studying the reverberation effect that may characterize the information diffusion process, rather than the single jump case that feature the previous case. This scenario points to rumors and gossips featuring potential and actual investors’ communities and social networks by extracting the share of informed investors at each simulation round from a triangular distribution centered around 0.15 with a width of 0.10
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