Information agent's role in shaping investor behaviors and global financial market quality

Abstract

Online trading platforms afford individual investors with a low cost solution to making investment decisions on their own. Market information such as price quotes and company news is provided to online investors, via information agents ranging from investment chat rooms to professional financial information vendors, faster and cheaper, too. Processed information in the form of financial forecasts is also readily available. The quality of this market information bound to have a profound impact on investor behaviors and, in turn, financial market quality. Yet, how the agents who principally gather and supply this information to investors impact investors and the market as a whole have not been thoroughly studied. Existing works are confined to subsets of financial markets. Moreover, prior research on financial market quality focuses on market structure parameters such as trading mechanism, information availability, and regulations. Information agents who largely determine what, how, and when information is disseminated are mostly neglected. In a rational expectation framework, this work investigates theoretically and empirically how information agents, and in particular interactions among them, in the market may impact investor behaviors in terms of aggressiveness and financial market quality in terms of efficiency, liquidity, and volatility. It also illustrates how different information agents may influence the financial markets differently because of their distinct characteristics. In particular, I show that independent agents effectively resolve asymmetric information, but at the same time act as additional sources of price variability. The expected level of informed trading is independent of agent characteristics such as the quality of its private signal, but the expected profit of informed trading and the expected loss of liquidity traders are increasing in the level of competition. Also, as independent information agents reduce uncertainty about the true value of the traded asset, they lessen price sensitivity to the net order flow and thereby improve overall market liquidity. Moreover, information agents serve to facilitate incorporation of information into price, thus price efficiency is decreasing in the level of concentration of these information agents. Lastly, variability of information signals contributes to variability in price, therefore price volatility is increasing in the number of independent information agents. This study formally establishes the relations between information agents and financial market quality, as well as how they account for crosssectional variations in liquidity, efficiency, and volatility among exchanges worldwide.

Date of Award	15 Jul 2014
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Huai Qing WANG (Supervisor)