Redundant Information and Predictable Intraday Returns

Abstract

This paper examines how well investors distinguish between genuinely novel private information and information that already is priced (labeled information). We derive a structural model of stock price returns that identifies investors’ non-Bayesian weighting of redundant information distinctly from information asymmetry, transaction costs, and serially correlated liquidity trader demand. We estimate this model using five-minute, 12-minute, and 30-minute returns and find that, on average, investors behave as if over 47 percent of the information content in the immediately prior price change is private information. These results suggest an information-processing mechanism that drives momentum and mean reversion in intraday returns.