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Algorithmic trading and investment-to-price sensitivity

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  • Aliyev, Nihad
  • Huseynov, Fariz
  • Rzayev, Khaladdin

Abstract

Does the increased prevalence of algorithmic trading (AT) produce real economic effects? We find that AT contributes to managerial learning by fostering the production of new information and thereby increases firms' investment-to-price sensitivity. We link AT's impact on the investment-to-price sensitivity to the revelatory price efficiency - extent to which stock prices reveal information for real efficiency. AT-driven investment-to-price sensitivity helps managers make better investment decisions, leading to improved firm performance. While in aggregate AT contributes positively to managerial learning, we also show that there is a subset of AT strategies, namely opportunistic AT that is harmful to managerial learning.

Suggested Citation

  • Aliyev, Nihad & Huseynov, Fariz & Rzayev, Khaladdin, 2022. "Algorithmic trading and investment-to-price sensitivity," LSE Research Online Documents on Economics 118844, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118844
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    File URL: http://eprints.lse.ac.uk/118844/
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    References listed on IDEAS

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    Keywords

    algorithmic trading; real effects of algorithmic trading; revelatory price efficiency; investment-to-price sensitivity;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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