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Reporting Bias and Information Discrepancy, and Consequences for Volatility in Financial Markets *

Reporting Bias and Information Discrepancy, and Consequences for Volatility in Financial Markets * This paper presents an analytical explanation of price volatility and mispricing in a rational financial market. In the proposed model, specialists might have private interest in manipulating their reports, which can affect the security price. Additionally, traders differ in terms of both rationality and available information. The present study shows that mispricing and price volatility occurs in a rational financial market when specialist reports are incorporated under different trader types. Also analyzed are comparative statics of the magnitude of misreports, the informativeness of the price, and price volatility when the ratio of superior traders to ordinary traders changes. Both price volatility and the potential for extra profit gain by superior traders might increase when they are dominant. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Reporting Bias and Information Discrepancy, and Consequences for Volatility in Financial Markets *

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Publisher
Wiley
Copyright
© 2010 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/j.2041-6156.2010.01022.x
Publisher site
See Article on Publisher Site

Abstract

This paper presents an analytical explanation of price volatility and mispricing in a rational financial market. In the proposed model, specialists might have private interest in manipulating their reports, which can affect the security price. Additionally, traders differ in terms of both rationality and available information. The present study shows that mispricing and price volatility occurs in a rational financial market when specialist reports are incorporated under different trader types. Also analyzed are comparative statics of the magnitude of misreports, the informativeness of the price, and price volatility when the ratio of superior traders to ordinary traders changes. Both price volatility and the potential for extra profit gain by superior traders might increase when they are dominant.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Oct 1, 2010

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