Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 178 - 193 |
| Number of pages | 16 |
| Journal | Journal of Banking and Finance |
| Volume | 41 |
| DOIs | |
| Publication status | Published - 2014 |
Cite this
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Competition, premature trading and excess volatility. / Deb, Pragyan; Koo, Bonsoo; Liu, Zijun.
In: Journal of Banking and Finance, Vol. 41, 2014, p. 178 - 193.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - Competition, premature trading and excess volatility
AU - Deb, Pragyan
AU - Koo, Bonsoo
AU - Liu, Zijun
PY - 2014
Y1 - 2014
N2 - A substantial body of research suggests that it is difficult to account for all of the volatility of asset prices in terms of news. This paper attempts to explain the excess volatility puzzle as a consequence of competitive interaction between market participants in the presence of noisy information. We develop a model of competitive interaction between market participants in response to unverified information. Our model shows that in the presence of competitive pressures, market participants find it optimal to act prematurely on unverified information. This premature reaction leads to lower total profits and excess market volatility in equilibrium. Our model also shows that the spike in volatility at the closing time of the market can be modelled as a direct consequence of premature trading.
AB - A substantial body of research suggests that it is difficult to account for all of the volatility of asset prices in terms of news. This paper attempts to explain the excess volatility puzzle as a consequence of competitive interaction between market participants in the presence of noisy information. We develop a model of competitive interaction between market participants in response to unverified information. Our model shows that in the presence of competitive pressures, market participants find it optimal to act prematurely on unverified information. This premature reaction leads to lower total profits and excess market volatility in equilibrium. Our model also shows that the spike in volatility at the closing time of the market can be modelled as a direct consequence of premature trading.
U2 - 10.1016/j.jbankfin.2013.12.022
DO - 10.1016/j.jbankfin.2013.12.022
M3 - Article
VL - 41
SP - 178
EP - 193
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
ER -