Financial Market Information Research Articles

Information in Financial Markets: Who Gets It First?

Information in Financial Markets: Who Gets It First?

Firm opacity and financial market information asymmetry

Abstract Information asymmetry could exist between the firm and the investors as well as among investors. If the information asymmetry between the firm and the investors is very high, all investors are largely uninformed, so information asymmetry between investors should be low. At the other extreme, if all investors are fully informed about the firm, again the information asymmetry between investors should be low. This paper finds evidence supporting such a nonlinear relationship between firm-to-investor and investor-to-investor information asymmetry. The inter-investor information asymmetry increases, and then declines, as the information asymmetry between the firm and the investor increases.

Towards a theory of social responsibility reporting

Purpose – Here, the paper aims to model major corporate characteristics associated with corporate social responsibility (CSR) reporting (in particular, its quality). Corporations in China are increasingly expected by the public and government to be more socially responsible. As such, it will be intriguing to ask, what are the characteristics associated with higher quality CSR reporting? Design/methodology/approach – CSR report quality scores are hand-gathered from HEXUN (web site) whilst financial and stock market information from the China Stock Market and Accounting Research (CSMAR) database. A total of 613 CSR reports' quality scores were utilized (Rankins CSR ratings) in the process of developing the model. Reports are hand-gathered from corporations listed on both the Shenzhen and Shanghai stock exchanges (SSE). Findings – The results suggest most interestingly, the quality of CSR report (mandatory) to be strongly, positively related with corporate financial characteristics: market capitalization (corporate size), shareholders' concentration of powers, corporate financial leverage (implying bondholders/debtors' influence). Surprisingly, CSR reporting is associated neither with corporate profitability nor by state-ownership. The presence of independent directors (at least in China) seems to have negative influences. Practical implications – CSR reporting may easily be mandated by government through a regulatory process. However, this does not necessarily lead to reports of a high quality. Instead, orientation towards higher visibility in social responsibility for listed corporations is better explained by financial characteristics: market valuation, ownership and leverage. Originality/value – This paper utilizes for the first time, in-depth and multi-faceted quality CSR scores (overall, segregated into macro-social, content and technology) for investigating CSR behavior of listed corporations in China. The findings suggest financial characteristics size (market valuation), ownership (shareholders' concentration of powers) and corporate leverage are better predictors of CSR behavior among listed corporations.

Sales Forecasting with Financial Indicators and Experts' Input

We present a method for forecasting sales using financial market information and test this method on annual data for US public retailers. Our method is motivated by the permanent income hypothesis in economics, which states that the amount of consumer spending and the mix of spending between discretionary and necessity items depend on the returns achieved on equity portfolios held by consumers. Taking as input forecasts from other sources, such as equity analysts or time‐series models, we construct a market‐based forecast by augmenting the input forecast with one additional variable, lagged return on an aggregate financial market index. For this, we develop and estimate a martingale model of joint evolution of sales forecasts and the market index. We show that the market‐based forecast achieves an average 15% reduction in mean absolute percentage error compared with forecasts given by equity analysts at the same time instant on out‐of‐sample data. We extensively analyze the performance improvement using alternative model specifications and statistics. We also show that equity analysts do not incorporate lagged financial market returns in their forecasts. Our model yields correlation coefficients between retail sales and market returns for all firms in the data set. Besides forecasting, these results can be applied in risk management and hedging.

PIN: Measuring Asymmetric Information in Financial Markets with R

The package PIN computes a measure of asymmetric information in financial markets, the so-called probability of informed trading. This is obtained from a sequential trade model and is used to study the determinants of an asset price. Since the probability of informed trading depends on the number of buy- and sell-initiated trades during a trading day, this paper discusses the entire modelling cycle, from data handling to the computation of the probability of informed trading and the estimation of parameters for the underlying theoretical model.

Competition and Incentive to Reveal Information in Financial Markets

In this paper I study the impact of competition in financial markets on incentive to reveal information. In a sample of mutual funds, I find that discretionary portfolio disclosure and advertising related expenses decrease with competition. This is interesting, as one would ordinarily expect funds to disclose more often and incur more advertising expenses in response to pressure from competing funds. However, this supports the theory that mutual funds use discretionary portfolio disclosure and advertising as marketing tools to attract new investments in a financial market, where superior relative performance and greater visibility are rewarded with convex payoffs. With higher competition, the likelihood of landing new investments goes down for each fund and at the same time the cost of disclosure goes up. Funds respond by cutting down on costly discretionary disclosure of portfolio holding information and advertising related activities. Thus competition seems to have adverse impact on market transparency and search cost.

The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes

The media are increasingly recognized as key players in financial markets. I investigate their causal impact on trading and price formation by examining national newspaper strikes in several countries. Trading volume falls 12% on strike days. The dispersion of stock returns and their intraday volatility are reduced by 7%, while aggregate returns are unaffected. Moreover, an analysis of return predictability indicates that newspapers propagate news from the previous day. These findings demonstrate that the media contribute to the efficiency of the stock market by improving the dissemination of information among investors and its incorporation into stock prices.

Thrainn Eggertsson and the Problem of Knowledge: The Effectiveness of Conveying Information in the Electoral and Financial Markets

Thrainn Eggertsson and the Problem of Knowledge: The Effectiveness of Conveying Information in the Electoral and Financial Markets

Central Bank Transparency and the Crowding Out of Private Information in Financial Markets

We use an asset market model based on Diamond (1985) to demonstrate that increased central bank transparency may lead to crowding out of costly private information, which can result in a market that is less able to predict monetary policy. Consequently, for intermediate levels of public information precision, it is optimal for the central bank to actually disclose less than it knows. We show that such crowding out can occur, even in the likely scenario that public information is more precise than private information, under the plausible assumption that traders are nearly risk neutral. Central banks should be aware of possible adverse effects of transparency and take note if market participants reduce investment in information.

Differential Access to Price Information in Financial Markets

Recently exchanges have been directly selling market data. We analyze how this practice affects price discovery, the cost of capital, return volatility, and market liquidity. We show that selling price data increases the cost of capital and volatility, worsens market efficiency and liquidity, and discourages the production of fundamental information relative to a world in which all traders freely observe prices. Generally allowing exchanges to sell price information benefits exchanges and harms liquidity traders. Overall, our results show that allowing exchanges to sell market data, rather than requiring it to be made freely available to the public, is undesirable.

The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes

This paper investigates the causal impact of the media in financial markets by exploiting exogenous media blackouts resulting from national newspaper strikes in several countries. Trading volume falls 14% on strike days. Stock volatility is also reduced, especially within the day, during which it falls by 9%. These effects are stronger for small firms. Moreover, the power of lagged stock returns for predicting current returns of small firms vanishes on media strike days, consistent with newspapers propagating news from the previous day. These findings demonstrate that the media influence the stock market by increasing the speed with which information diffuses across investors, and is impounded into stock prices.

Utilizing financial market information in forecasting real growth, inflation and real exchange rate

In this paper we build an open economy extension of the Gordon (1962) valuation model that suggests a simple forecasting system for three macroeconomic variables; the real growth, inflation and real exchange rate. All the forecasting equations in our system utilize current financial market information in the form of dividend yields and short-term interest rate. Our empirical results indicate that these simple forms of financial market information are relevant for forecasting the time-varying underlying trends in the macroeconomic data for the U.K., Eurozone and Japan, when treating the U.S. as the world market.

Macroeconomic Effects of Central Bank Communication: Evidence from the Fed

This paper employs exogenous measures of monetary policy shocks directly derived from financial market information to investigate how the economy responds to the surprise component of monetary policy decisions as opposed to central bank announcements about future movements in the policy rate. We find that the U.S. economy strongly reacts to the news shock, the difference between what the central bank announces regarding the future direction of monetary policy and what the market expects it to announce. The responses of output and prices to the unexpected component of policy decisions regarding the federal funds target rate are weak and have implausible signs.

Asymmetric Information in Financial Markets: Anything Goes

I study a standard Grossman and Stiglitz (1980) noisy rational expectations economy, but relax the usual assumption of the normality of fundamental and supply. My solution approach dispenses with the typical \conjecture and verify method and enables me to analytically solve an entire class of previously intractable nonlinear models that nests the standard model. I show how: (1) price jumps and crashes may arise endogenously, purely due to learning eects, (2) observation of the net trading volume of informed and noise traders may be valuable for investors in the economy as it can provide a renement of the information conveyed by price, (3) the value of acquiring information may be non-monotonic in the number of informed traders, leading to multiple equilibria in the information market, and (4) the relation between disagreement and future returns is ambiguous. In short, many of the results from noisy rational expectations models are not robust. Finally, I introduce monotone likelihood ratio conditions that determine the signs of the various comparative statics, which represents the rst demonstration of the importance of the MLRP for comparative statics

Monetary policy flexibility, risk management, and financial disruptions

This paper argues that the monetary policy that is appropriate during an episode of financial market disruption is likely to be quite different than in times of normal market functioning. When financial markets experience a significant disruption, a systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information, and decisive actions may be required to reduce the likelihood of an adverse feedback loop. The central bank also needs to exhibit flexibility—that is, less inertia and gradualism than would otherwise be typical—not only in moving decisively to reduce downside risks arising from a financial market disruption, but also in being prepared to take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.

Derivative Price Information Use in Hydroelectric Scheduling

Hydropower producers face the challenge of scheduling the release of water from reservoirs under uncertain future electricity price and reservoir inflow. Using weekly data from thirteen Norwegian power plants during 2000-2006, we find that electricity derivatives prices affect the scheduling decisions significantly. Hence, consistent with recommendations by several theoretical Operations Management studies, financial market information is used in the everyday production planning practice. As expected, production is high at relatively high reservoir levels and is low at high electricity price volatility. When the reservoir level is low, the production is less dependent on the electricity price. Since our empirical model explains about 88% of the realized variation in the power plant scheduling, the model can be used to simplify the scheduling in practice.

On “Acquisition of Information in Financial Markets”

In their paper Information Acquisition in Financial Markets (this journal, 2000), Barlevy and Veronesi present a model of a one-period financial market, and claim that for an open set of parameter values, the value of information increases with the mass of informed agents. That claim is shown here to be false. The property of strategic substitution is robust in their model.

Information and Noise in Financial Markets: Evidence from the E-Mini Index Futures

We examine the informational contributions and effects on transitory volatility of trades initiated by different types of traders in three actively traded index futures markets. The results show that trades initiated by exchange member firms account for over 60% of price discovery during the trading day. These institutional trades appear to be more informative than trades of individual exchange members or off-exchange traders. We also find that off-exchange traders introduce more noise into the prices than do exchange members. Our results provide new evidence on the roles of different types of traders in the price formation process.

Using Financial Markets Information to Identify Oil Supply Shocks in a Restricted VAR

This paper introduces a methodology for identifying oil supply shocks in a restricted VAR system for a small open economy. Financial market information is used to construct an identification scheme that forces the response of the restricted VAR model to an oil shock to be the same as that implied by futures markets. Impulse responses are then calculated by using a bootstrapping procedure for partial identification. The methodology is applied to Finland and Sweden in illustrative examples in a simple 5-variable model. While oil supply shocks have an inflationary effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is more ambiguous.

DefProb: A Corporate Probability of Default Model

This paper presents a method and testing of a corporate nonfinancial default model. Unique among models, it uses agency ratings as as input within the model, as well as financial statement and market information (e.g., Merton model). The default problem is defined as having a flat maximum, well-suited for a simple approach.