Overweighting of public information in financial markets: A lesson from the lab
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Title
Overweighting of public information in financial markets: A lesson from the labDate
2021-08-18Publisher
ElsevierISSN
0378-4266Bibliographic citation
RUIZ-BUFORN, Alba, et al. Overweighting of public information in financial markets: A lesson from the lab. Journal of Banking & Finance, 2021, vol. 133, p. 106298.Type
info:eu-repo/semantics/articleVersion
info:eu-repo/semantics/publishedVersionSubject
Abstract
We study the information aggregation process in a laboratory financial market where traders have access to costly private and free public imperfect information. The public disclosure provokes (i) a crowding-out effect ... [+]
We study the information aggregation process in a laboratory financial market where traders have access to costly private and free public imperfect information. The public disclosure provokes (i) a crowding-out effect on traders’ information demand, (ii) a market overreaction to the public signal, and (iii) a deterioration in price informativeness. We show that the reduction in price informativeness is a direct consequence of the overweighting of public information when aggregated in prices. Moreover, we provide experimental evidence for the theoretical conjecture that the overweighting effect and the subsequent market overreaction to public disclosures are directly related to traders’ second- (or higher) order beliefs. From an economic policy perspective, we provide support that when deciding on a communication strategy, regulatory institutions can smooth the market overreaction by properly setting the level of transparency of their disclosures. [-]
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Journal of Banking and Finance 133 (2021) 106298Related data
https://ars.els-cdn.com/content/image/1-s2.0-S0378426621002508-mmc1.ziphttp://hdl.handle.net/10234/194878
Funder Name
Universitat Jaume I | Ministerio de Ciencia, Innovación y Universidades (Spain) | Ministerio de Educación
Project code
UJI-B2018- 77 | RTI2018-096927-B-I00 | FPU2014/01104
Rights
info:eu-repo/semantics/openAccess
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- ECO_Articles [696]