nep-mst New Economics Papers
on Market Microstructure
Issue of 2008‒12‒07
three papers chosen by
Thanos Verousis
University of Wales (Aberystwyth)

  1. Insiders-outsiders, transparency and the value of the ticker By Foucault, Thierry; Cespa, Giovanni
  2. Information Exchange and the Limits of Arbitrage By Gray, Wesley
  3. Soft information in earnings announcements: news or noise? By Elizabeth Demers; Clara Vega

  1. By: Foucault, Thierry; Cespa, Giovanni
    Abstract: In this paper, the authors consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay.
    Keywords: market data sale; latency; transparency; price discovery; Hirsh-leifer effect
    JEL: D46 D53
    Date: 2008–09–01
  2. By: Gray, Wesley
    Abstract: Evidence suggests that arbitragers exchange investment ideas. We analyze why and under what circumstances sharing occurs. Our model suggests that sharing ideas will lead to the following: more efficient asset prices, larger arbitrager profits, and correlated arbitrager returns. We predict that arbitragers will exchange ideas in markets where arbitragers are capital constrained, noise trader influence is high, and arbitrage investors are more loss averse. We also predict that arbitrage networks can lead to crowded trades, which can create systematic risk in extreme market circumstances.
    Keywords: arbitrage; hedge funds; market efficiency; information exchange; social networks; loss aversion; crowded trades
    JEL: G14 G12 G11 G10
    Date: 2008–12–01
  3. By: Elizabeth Demers; Clara Vega
    Abstract: This paper examines whether the "soft" information contained in the text of management's quarterly earnings press releases is incrementally informative over the company's reported "hard" earnings news. We use Diction, a textual-analysis program, to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers' language affects announcement period abnormal returns and predicts post-earnings announcement drift. We find that it takes longer for the market to understand the implications of soft information than those of hard information. We also find that the market response varies by firm size, turnover, media and analyst coverage, and the extent to which the standard accounting model captures the underlying economics of the firm. We also show that the second moment of soft information, the level of certainty in the text, is an important determinant of contemporaneous idiosyncratic volatility, and it predicts future idiosyncratic volatility.
    Date: 2008

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