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Much ado about making money: the impact of disclosure, news and rumors on the formation of security market prices over time

Author

Listed:
  • Yuri Biondi

    (University Paris Dauphine PSL
    ESCP Europe)

  • Simone Righi

    (Alma Mater Studiorum - University of Bologna
    Hungarian Academy of Sciences)

Abstract

This article develops an agent-based model of security market pricing process, capable to capture main stylised facts. It features collective market pricing mechanisms based upon evolving heterogenous expectations that incorporate signals of security issuer fundamental performance over time. Distinctive signaling sources on this performance correspond to institutional mechanisms of information diffusion. These sources differ by duration effect (temporary, persistent, and permanent), confidence, and diffusion degree among investors over space and time. Under full and immediate diffusion and balanced reaction by all the investors, the value content of these sources is expected to be consistently and timely integrated by the market price process, implying efficient pricing. By relaxing these quite heroic conditions, we assess the impact of distinctive information sources over market price dynamics, through financial systemic properties such as market price volatility, exuberance and errancy, as well as market liquidity. Our simulation analysis shows that transient information shocks can have permanent effects through mismatching reactions and self-reinforcing feedbacks, involving mispricing in both value and timing relative to the efficient market price series. This mispricing depends on both the information diffusion process and the ongoing information confidence mood among investors over space and time. We illustrate our results through paradigmatic cases of stochastic news, before generalising them to autocorrelated news. Our results are further corroborated by robustness checks over the parameter space and across several market trading mechanisms.

Suggested Citation

  • Yuri Biondi & Simone Righi, 2020. "Much ado about making money: the impact of disclosure, news and rumors on the formation of security market prices over time," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(2), pages 333-362, April.
    • Handle: RePEc:spr:jeicoo:v:15:y:2020:i:2:d:10.1007_s11403-017-0201-8
    DOI: 10.1007/s11403-017-0201-8
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    Cited by:

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    2. Iryna Veryzhenko, 2021. "Who gains and who loses on stock markets? Risk preferences and timing matter," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 28(2), pages 143-155, April.

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    More about this item

    Keywords

    Market efficiency; Disclosure; Information diffusion; Agent-based modelling;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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