What Determines the Stock Price and the Informative Efficiency: The Omitted Information Frequency Observed

The traditional model in the competitive stock market assumes that the observational frequency of information is uniform, and concludes that the stock market equilibrium price which aggregates market information provides a sufficient statistic reflecting all the private information in the market. However, we are the first to assume that the observational frequency of an information is not uniform. Actually, information is heterogeneous among market participants, and there is an information asymmetry among investors. The main purpose of this study is to explore the relationship among information precision, the observational frequency of information and the stock market equilibrium. The study analyze the determination of the price system in a competitive stock market, where there are l sources of information which are respectively observed f1, f2, …, fI times by risk-averse traders. Each informed investor uses information observed to form an estimate for the expected value of the firm’s true value, , and to make decisions to buy the shares to maximize his own expected utility, and hence, determine the stock market equilibrium. Our main findings are as follows: Firstly, we found that the competitive equilibrium price is equal to the rational expectations equilibrium price. Only when the observational frequencies of each piece of market information are equal, will the fully-informed equilibrium become a special case of competitive equilibrium. Secondly, we found that the market equilibrium price aggregates all the market information, contingent on each observational frequency and its precision. The market equilibrium condition and the expected utility depend not only on the realized information, but also on the observational frequency and the precision of information. The market equilibrium price will fully reflect the precision and the observational frequency of information about the future value of asset. The stock price response to an unexpected change of information is positively related to the observational frequency and the precision of that information. We found that, the heterogeneity of belief about the true value of the risky asset among investors will lead to different regimes of market equilibrium. Thirdly, when the observational frequency of each piece of market information is uniform, Grossman’s model (1976) is mathematically equivalent to a special case of our model, and the market equilibrium price could act as a sufficient statistic for all the private information about the intrinsic value of the risky asset. However, the observational frequencies of market information with asymmetry are usually not uniform such that traders still have an incentive to collect costly information. Finally, further research could investigate how accurate the market equilibrium price is as a sufficient statistic for all the market information. Key words: Information precision, observational frequency of information, stock market equilibrium, information value.

The traditional model in the competitive stock market assumes that the observational frequency of information is uniform, and concludes that the stock market equilibrium price which aggregates market information provides a sufficient statistic reflecting all the private information in the market. However, we are the first to assume that the observational frequency of information is not uniform. Actually, information is heterogeneous among market participants, and there is an information asymmetry among investors. Our main purpose is to explore the relationship among information precision, the observational frequency of information and the stock market equilibrium. We analyze the determination of the price system in a competitive stock market where there are I sources of information x1, x2,... x(subscript I) which are respectively observed f1, f2,…, f(subscript I) times by risk-averse traders. Each informed investor uses information observed to form an estimate for the expected value of the firm's true value, v, and to make decisions to buy the shares to maximize his own expected utility, and hence determine the stock market equilibrium. Our main findings are as follows: First, we find that the competitive equilibrium price is equal to the rational expectations equilibrium price. Only when the observational frequencies of each piece of market information are equal, will the fully-informed equilibrium become a special case of competitive equilibrium. Second, we find that the market equilibrium price aggregates all the market information, contingent on each observational frequency and its precision. The market equilibrium condition and the expected utility depend not only on the realized information, but also on the observational frequency and the precision of information. The market equilibrium price will fully reflect the precision and the observational frequency of information about the future value of asset. The stock price response to an unexpected change of information is positively related to the observational frequency and the precision of that information. We find that the heterogeneity of belief about the true value of the risky asset among investors will lead to different regimes of market equilibrium. Third, when the observational frequency of each piece of market information is uniform, Grossman's model (1976) is mathematically equivalent to a special case of our model, and the market equilibrium price could act as a sufficient statistic for all the private information about the intrinsic value of the risky asset. However, the observational frequencies of market information with asymmetry are usually not uniform such that traders still have an incentive to collect costly information. Finally, further research could investigate how accurate the market equilibrium price is as a sufficient statistic for all the market information.

SECURITY PRICES, RISK, AND MAXIMAL GAINS FROM DIVERSIFICATION*

In the literature, representativeness heuristic is commonly viewed as a cause of asset price overreaction to new information. This paper proves that representativeness heuristic can cause asset price under-reaction to new information in a competitive securities market. Specifically, there is one risk-free asset and one risky asset. Both rational and heuristic traders trade can against each other or against noise traders whose demand is random. The payoff of the risky asset is unknown but all traders receive an informational signal about the risky asset’s payoff before any trading takes place. Due to the representativeness heuristic, the updated mean of the risky asset’s payoff for heuristic traders is higher (lower) than that for rational traders when the realization of the informational signal is above (below) the expected payoff of the risky asset. The results of the paper suggest that regardless of noise traders being net buyers or sellers, the representativeness heuristic causes the asset price to overreact to new information close to the expected payoff of the risky asset and causes the asset price to underreact to new information far above or below the expected payoff of the risky asset.

Many models of market balance has created by some researchers, one of this is CAPM Model, as the model to measure the market efficiency. The utilization of this model also enables to explain the role of information from public and private and valuable to advantage strategy in investation decision. In CAPM the use of index number as proxy of market information is an important issue. The index number also became a problem if they are not reflected all the market information, because the imbalance of the liquidity of stocks in the market. This research tries to test weather there is or not the cointegration under Index Mover Stock and the Composite Stock Index in ISE. If the IMS only consist of the small number of conyegration stock in CSI, it’s indicate the market information stil not reflected the whole information the public information, and the movement of the public information is influence by the private information, as vice versa. The results indicate the significant cointegration between IMS and CSI, means market information as public still not reflected the the whole available information. It is indicate JSE market still in the Weak Form Efficient Market. This research implicate it is need to be aware in the use of market index in testing the CAPM model (beta score) as proxy as the performance measurement or expected return prediction of individual stock in JSE in Weak Form Efficient Market condition is against the CAPM assumption itself. Keywords: Cointegrated, Composite Index.

This paper discusses main factors affecting the magnitude of price from a theoretical perspective under a sequence of public and private information releases about the real value of a single risky asset. The market possesses prior information about the mean and variance of the value of the risky asset, as well as the crosscorrelation between the public and private information. By using comparative static analysis, our model furnishes some structures to investigate the variation of stock price changes under the sequential information releases. This paper shows some unambiguous results for most of the determinants by placing certain restrictions on the intertemporal correlation and inter-information sources correlation, respectively.

I HAVE SHOWN elsewhere that competitive markets can be over-informationally efficient. (See Grossman [1975] for this and a review of other work in this area.) If competitive prices reveal too much information, traders may not be able to earn a return on their investment in This was demonstrated for a market with two types of traders, and uninformed. Informed traders learn the true underlying probability distribution which generates a future price, and they take a position in the market based on this When all informed traders do this, current prices are affected. traders invest no resources in collecting information, but they know that current prices reflect the information of informed traders. Uninformed traders form their beliefs about a future price from the information of informed traders which they learn from observing current prices. In the above framework, prices transmit However, it is often claimed that prices aggregate In this paper we analyze a market where there are n-types of informed traders. Each gets a piece of information. In a simple model we study the operation of the price system as an aggregator of the different pieces of We consider a market where there are two assets; a risk free asset and a risky asset. Each unit of the risky asset yields a return of P1 dollars. P1 will also be referred to as the price of the risky asset in period 1. In period 0 (the current period), each trader gets information about P1 and then decides how much of risky and non-risky assets to hold. This determines a current price of the risky asset, P0, which will depend on the information received by all traders. We assume that the ith trader observes yj, where yi = PI + ,E. There is a noise term, 'E, which prevents any trader from learning the true value of P1. The current equilibrium price is a function of (Y1Y25 ... Yn); write it as PO(Y,Y2, ... 5Yn). The main result of this paper is that when there are n-types of traders (n > 1), PO reveals information to each trader which is of higher quality than his own That is, the competitive system aggregates all the market's information in such a way that the equilibrium price summarizes all the information in the

Information Intensity, Informative Equilibrium, and the Value of Information: An Analysis of Competitive Stock Market

In their seminal paper, Ball and Brown (1968) documented a positive statistical association between earnings surprises and stock returns around an earnings announcement. They concluded that earnings conveyed useful information to the market. However, the question of whether the exchange rate loss, as a component of earnings, affects the stock market has never been answered yet. The purpose of this paper is to examine the effect of reporting of exchange rate losses on the stock market. Empirical model is estimated using OLS and multiple regression is used to analyze the relationship between exchange rate loss and stock price. A sample of 106 companies is divided into group 1 (companies with exchange rate loss) and group 2 (companies without exchange rate loss). All of the data are derived from COMPUSTAT tape for the year 1995-1996, with Standard and Poor 500 category. The results of this study support the hypothesis that there is a correlation between reporting of exchange rate losses and stock price. Thus the stock price responds exchange rate loss reflexted in earnings.

A Dynamic Model of the Transmission of Price Information in Auto Insurance Markets Abstract A model of the demand structure of auto insurance markets is constructed in which consumers learn about firms through friends and neighbors. Consumers firms when the price differential exceeds a certain threshold, the switch cost. Data from New York and Alberta auto insurance markets are used to measure costs and the effective speed of transmission of information in these markets. Introduction A dominant theme in the literature exploring the implications of imperfect knowledge on the part of market participants has been that the way in which information is transmitted among and processed by agents is a critical determinant of market dynamics and outcomes [Rothschild (1973), Holmstrom (1984), Rogerson (1983), Shapiro (1982)]. In discussing the consumer's problem of searching for the lowest price in markets with price dispersion, Rothschild (1974) noted that, although demand functions are determined by the rules which searchers follow, very little empirical work had been done to determine how consumers actually gather information in these markets. In this article, a model of the demand structure of auto insurance markets is constructed which is consistent with the observed process by which consumers gather price information in those markets. The model is static on the firm side with no entry or exit. At period t = 0 a given group of firms sets prices which do not vary over the remaining periods. Consumers gradually learn about these prices. Proceeding in this manner allows modelling in detail the dynamics of the demand structure, generating the market shares of all firms in each time period. The focus of the literature on price dispersion in markets has been on equilibrium outcome [Carlson and McAfee (1983), Pratt, Wise and Zeckhauser (1979)] which in real-world markets may be reached only after many years, or not at all, given the random events and structural changes in the institutional environment. Constructing a dynamic model of the demand structure allows measurement of the effective speed of transmission of information in the markets for auto insurance in Alberta from 1976 through 1980 and in New York State from 1977 through 1983. The result is a model in which markets slowly tend to an equilibrium as agents learn about the structure of the marketplace, rather than one in which markets are always in equilibrium, instantly adjusting to exogenous shocks. The focus is on only the demand side of the market. Equilibrium search models which illustrate the behavior of firms rely on simplifying assumptions regarding the demand structure. In this model the complexity of the demand structure precludes the use of analytical techniques on the firm side. Dahlby and West (1986) have recently used an extensive set of auto insurance data from Alberta to test Carlson and McAfee's equilibrium price dispersion model which makes the following assumptions: (1) consumers know the distribution of prices, (2) all firms are equally likely to be sampled in the search process, and (3) the market is in equilibrium. In the model presented in this article, on the other hand, consumers are not assumed to know the distribution of prices. More importantly, a key feature which is not present in other search models is that a firm with larger market share is more likely to be sampled in the search process because it will have more consumers disseminating information about the firm, and will generally have more marketing outlets facilitating contact with prospective consumers. The model is fitted to data from New York State and the Dahlby and West study, and the results are compared. The empirical evidence on consumer information acquisition patterns and the existence of price dispersion in auto insurance markets are first discussed. Then the model of consumer demand is developed and empirically tested, followed by a summary. …

Iran Insurance Company intends to raise its financial credit and render enhanced services to the insured and the public. The need to meet financial obligations arising from the claims requires determination of the optimum deposited claims reserve with banks. Therefore, the present research study aimed at finding the loss ratio (incurred losses to premium), and determining the optimum portfolio of risky and risk-free assets of insurance companies during 1996-2017 by conducting a case study on Iran Insurance Company. Based on the relevant data, the highest loss ratio with 81 percent belonged to 1998-99 and the lowest ratio with 62 percent belonged to 2003-04. In order to determine the optimum portfolio of Iran Insurance Company, Konno Mean-Absolute Deviation Portfolio Optimization Model was utilized. According to the Konno Model, the optimum portfolios of risk-free and risky assets are as follows: Short-term banking deposits with 9 percent, long-term banking deposits with 46 percent, bank certificates of deposits (CDs) and participation papers with 9 percent, stocks of companies listed on Tehran Stock Exchange (TSE) with 17 percent, stocks of companies not listed on the TSE with 11 percent, and other assets, i.e. risky assets, including housing loan for employees of insurance companies, offering facilities to the agencies of insurance companies, purchasing immovable assets, and other financial instruments and constructions with 8 percent.

Market liberalization created a situation where there are no guaranteed grain prices, no central information source and the need for marketing information increased. Unfortunately, most farmers have little or no access to marketing information. This study evaluates farmers’ perceptions of importance of marketing information; identifies farmers’ sources of grain marketing information; determine farmers’ confidence in and use of marketing information; and assesses determinants farmers’ willingness (WTP) to pay for marketing information. Data used in this study were generated using a structured questionnaire in a survey that covered a random sample of 120 households in traditionally grain surplus-and deficit zones of Kenya. The data were analyzed by descriptive statistics and logit model. Results show that 68% and 55% of the households in grain surplus and deficit zones, respectively, recognized that marketing information was very important. Farmers received marketing information from multiple sources, mainly from traders and other farmers. Most of the farmers who received the information were not utilizing the information due to perceived unreliability of the information and poor access to complementary infrastructure. Education level of the household was the most significant factor that positively affected farmers’ WTP for marketing information. In view of farmers’ perception that information provided by the private sources is unreliable, the public sector ought to provide marketing information as a public service. Smallholder farmers should be catalyzed to form strong associations so as to enjoy economies of scale in accessing marketing information and markets.

In this paper, we apply a ARJI-Trend model, which combining component model and ARJI model, proposed by Engle and Lee (1993) and Chan and Maheu (2002), to study the relationship of information transmission between ADR and underlying stocks and estimate the permanent and transitory factors of volatility. Five ADRs are examined in this study, including TSM, UMC, ASX, AUO, and CHT. Furthermore, the Kalman filter model is used to distinguish the trading amount rate of change into expected and unexpected rate of change, for assessing the degree of information and noise shocks. It is capable of examining whether ADR have different responses to the information in underlying stock market by observing the variations of underlying stock’s trading volume. The empirical result shows that the both shock of information and noise have response to the return of ADR by underlying stock’s volume and exists the phenomenon of “Quantity first price line”. It is also found that both permanent and transitory components of the conditional variance really exist and the shock of the temporary component of conditional variance is larger than the permanent component. Because there is no limit up or down in ADR’s secondary market, the temporary shock of stock return is larger than the permanent shock.

We analyze the effects of stock market and exchange rate information in a forward-looking Taylor rule for monthly data from 14 OECD countries during the years 1999–2016. Especially the stock market information in the form of dividend but also the currency market information in the form of real exchange rate are revealed to be relevant in Taylor rule for many of the countries examined by helping to strengthen the role of inflation and real economic activity deviations in the policy rule. In many cases the rule also seems to be opportunistic, i.e., the inflation target has been time-varying.

The Vietnam stock market is a new market in which dividend taxes are higher than capital gains taxes, Vietnamese firms have a high state-ownership, a majority of dividends are paid by cash and there is significant inconsistency in dividend payouts. This paper investigates the effect of dividend increase announcements on stock price reactions. A total of 198 announcements for 101 companies listed on the HOSE market was investigated, the results indicated that announcements of dividend increase do not cause reactions in security prices. The obtained results support Black’s tax-based dividend signaling hypothesis about the condition for dividend announcements becoming market information when dividend taxes are higher than capital gains taxes. These findings of this study are also in line with other previous studies.