On the negative value of information in informationally inefficient markets: Calculations for large number of traders |
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Authors: | Christian Pfeifer Klaus Schredelseker Gilg UH Seeber |
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Institution: | 1. Institut für Statistik, Universität Innsbruck, Universitätsstraße 15, 6020 Innbruck, Austria;2. Institut für Banken und Finanzen, Universität Innsbruck, Austria;3. Institut für Politikwissenschaft, Universität Innsbruck, Austria |
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Abstract: | In informationally inefficient markets, classical decision theory assumes the value of information to be positive. Recent developments, however, contradict this paradigm. Schredelseker Schredelseker, K., 2001. Is the usefulness approach useful? Some reflections on the utility of public information. In: McLeay, S., Riccaboni, A. (Eds.), Contemporary Issues in Accounting Regulation, Kluwer Academic Publishers, Boston, pp. 135–153] proposed a simulation model wherein a single security is traded among non-cooperating and asymetrically informed traders. One of the main results was the fact that badly informed traders could expect higher returns than traders with more information. But Schredelseker was able to give exact results for a small number of traders only. The aim of this paper is to give reliable results for a sufficiently large number of traders for both the expected gain and the probability of gain larger than zero. We are using combinatorial methods in order to get exact results for badly informed traders and simulation techniques for results of traders with higher level of information. The exact results are used (error between exact results and simulation results for the first traders) to determine the number of samples which have to be drawn with the simulation algorithm. |
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Keywords: | Stochastic processes Value of information Inefficient markets Asymmetric information Simple random walk |
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