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Information and Trading in Financial Markets

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Hilton Atlanta, Grand Ballroom C
Hosted By: American Finance Association
  • Chair: Itay Goldstein, University of Pennsylvania

Where Has All the Big Data Gone?

Maryam Farboodi
,
Princeton University
Adrien Matray
,
Princeton University
Laura Veldkamp
,
Columbia University

Abstract

As ever more technology is deployed to process and transmit financial data, this could benefit society, by allowing capital to be allocated more efficiently. Recent work supports this notion. Bai, Philippon and Savov (2016) document an improvement in the ability of S&P 500 equity prices to predict firms' future earnings. We show that most of this ``price informativeness" rise can be attributed to a size composition effect. S&P 500 firms are getting older and larger. In contrast, the average public firm's price information is deteriorating. Do these facts imply that big data failed to price assets more efficiently? To answer this question, we formulate a model of data-processing choices. We find that big data growth, in conjunction with a change in the firm size distribution, can trigger a decline in informativeness for small firms. The model also reveals how big data growth can masquerade itself as size composition. The implication is that ever-growing reams of financial data may be helping price assets more accurately. But this might not deliver financial efficiency benefits for the vast majority of firms.

Innovation and Informed Trading: Evidence from Industry ETFs

Shiyang Huang
,
University of Hong Kong
Maureen O'Hara
,
Cornell University
Zhuo Zhong
,
University of Melbourne

Abstract

We hypothesize that industry exchange traded funds (ETFs) encourage informed trading on underlying firms through facilitating hedging of industry-specific risks. We show that short interest on industry ETFs, reflecting part of the “long-the-stock/short-the-ETF” strategy, positively predicts returns on these ETFs and the percentage of positive earnings announcements of underlying stocks. We also show that hedge funds’ long-short strategy using industry ETFs and industry ETF membership reduces post-earnings-announcement- drift. Our results suggest that financial innovations such as industry ETFs can be beneficial for informational efficiency by helping investors to hedge risks.

Informing the Market: The Effect of Modern Information Technologies on Information Production

Meng Gao
,
University of Illinois-Urbana-Champaign
Jiekun Huang
,
University of Illinois

Abstract

Modern information technologies have fundamentally changed how information is disseminated in financial markets. Using the staggered implementation of the EDGAR system in 1993--1996 as a shock to information dissemination technologies, we find evidence that internet dissemination of corporate information increases information production by corporate outsiders. Specifically, trades by individual investors in a stock become more informative about future stock returns after the stock becomes subject to mandatory filing on EDGAR. This effect is driven primarily by investors who have access to the internet. The amount and accuracy of information produced by sell-side analysts increase following the EDGAR implementation. Market responses to analyst revisions also become stronger after a firm becomes an EDGAR filer. Furthermore, stock pricing efficiency improves after the EDGAR implementation. Overall, these results suggest that greater and broader information dissemination facilitated by modern information technologies improves information production and stock pricing efficiency.

Transparency and Dealer Networks: Evidence from the Initiation of Post-Trade Reporting in the Mortgage Backed Security Market

Paul Schultz
,
University of Notre Dame
Zhaogang Song
,
Johns Hopkins University

Abstract

We examine the introduction of mandatory post-trade reporting in the TBA mortgage-backed securities market. With post-trade reporting, trading costs fell for institutional investors. Trading costs declined more for investors’ trades with peripheral dealers than for their trades with core dealers. Peripheral dealers’ market share dropped after the introduction of post-trade reporting, suggesting that opacity was protecting inefficient high-cost dealers. Interdealer trades and volume declined as transparency made it easier to find natural counterparties. Relationships between dealers became less important and, after controlling for the number of trades, dealers used more counterparties in interdealer trades.
Discussant(s)
Brian Weller
,
Duke University
Francesco Franzoni
,
University of Lugano (USI) and Swiss Finance Institute
Liyan Yang
,
University of Toronto
Hendrik Bessembinder
,
Arizona State University
JEL Classifications
  • G1 - General Financial Markets