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Market Informational Inefficiency, Risk Aversion and Quantity Grid

Author

Listed:
  • Jean-Paul Decamps

    (CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Stefano Lovo

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper we show that long run market informational inefficiency is perfectly compatible with standard rational sequential trade models. Our inefficiency result is obtained taking into account two features of actual financial markets: tradable quantities belong to a quantity grid and traders and market makers do not have the same degree of risk aversion. The implementation of our model for reasonable values of the parameters suggests that the long term deviations between asset prices and fundamental value are important. We explain the ambiguous role of the quantity grid in exacerbating or mitigating market inefficiency. We show that stock splits can improve the information content of the order flow and consequently increase price volatility.

Suggested Citation

  • Jean-Paul Decamps & Stefano Lovo, 2003. "Market Informational Inefficiency, Risk Aversion and Quantity Grid," Working Papers hal-00592016, HAL.
    • Handle: RePEc:hal:wpaper:hal-00592016
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    References listed on IDEAS

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    Cited by:

    1. Jean-Paul Decamps & Stefano Lovo, 2006. "A note on risk aversion and herd behavior in financial markets," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 31(1), pages 35-42, July.
    2. LOVO, Stefano & DECAMPS, Jean-Paul, 2002. "Risk aversion and herd behavior in financial markets," HEC Research Papers Series 758, HEC Paris.

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    More about this item

    Keywords

    Informational efficiency; quantity grid; stock splits;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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