On the negative value of information in informationally inefficient markets: Calculations for large number of traders

Pfeifer, Christian; Schredelseker, Klaus; Seeber, Gilg

doi:10.1016/j.ejor.2008.01.015

Cited by 23 publications

(5 citation statements)

References 7 publications

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“…The figures chosen (10 coins, 10 traders) are large enough to ensure reliable results and small enough to allow for results that are easily presentable; increasing the number of traders does not change the basic findings (Pfeifer et al, 2009). In a thin market like this, traders are not price-takers and market prices are not fully informationally efficient; as we want to study markets that are somewhat less than efficient this is no fault but welcome and will drive some of the main results.…”

Section: The Modelmentioning

confidence: 99%

Pascal's Wager and Information

Schredelseker

2014

Journal of Forecasting

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Should we make financial forecasts? The usual answer looks like Pascal's wager: we don't know whether God exists; who erroneously believes loses nothing, who correctly believes wins everything; who correctly disbelieves, gains nothing, who erroneously disbelieves loses everything. Believing is thus a dominant choice. Turned to finance: markets are efficient or not. In an efficient market forecasters and non‐forecasters win nothing; in a non‐ efficient market forecasters win and non‐forecasters lose. Forecasting is rational if inefficiencies have a probability > 0. We use an agent‐based approach in studying the information value in a market with endogenous prices. We show that in inefficient markets rational traders don't make forecasts and an improvement in public information may even be harmful for the users. On average, an investor who has no information (index investor) performs like the market does; it is impossible that all others—those who know more than nothing—perform better. Pascal's wager does not apply. Copyright © 2014 John Wiley & Sons, Ltd.

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Section: The Modelmentioning

confidence: 99%

Pascal's Wager and Information

Schredelseker

2014

Journal of Forecasting

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“…Another natural way to analyze the problem is to consider inefficient markets. Different simulation studies by Schredelseker (1984Schredelseker ( , 2001 and Pfeifer et al (2009) show that for markets out of equilibrium and with asymmetric information the relationship between forecast accuracy and trading profitability might be non-monotonic. This could be an explanation of the fact that linear or monotonic statistical measures, such as Pearson or Spearman correlation, detect only weak or no dependence in the empirical data.…”

Section: Introductionmentioning

confidence: 99%

On the Relation between Forecast Precision and Trading Profitability of Financial Analysts

Marinelli

Weissensteiner

2013

SSRN Journal

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We analyze the relation between earning forecast accuracy and expected profitability of financial analysts. Modeling forecast errors with a multivariate Gaussian distribution, a complete characterization of the payoff of each analyst is provided. In particular, closedform expressions for the probability density function, for the expectation, and, more generally, for moments of all orders are obtained. Our analysis shows that the relationship between forecast precision and trading profitability need not to be monotonic, and that, for any analyst, the impact on his expected payoff of the correlation between his forecasts and those of the other market participants depends on the accuracy of his signals. Furthermore, our model accommodates a unique full-communication equilibrium in the sense of Radner (1979): if all information is reflected in the market price, then the expected payoff of all market participants is equal to zero.

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“…The results obtained by Schredelseker were based on a small number of traders. Later on, Pfeifer et al [14] were able to verify the negative value of information on returns for a sufficient large number of traders. Traders with less information seem to be at an advantage because of the part of that information that is unknown to them.…”

Section: Introductionmentioning

confidence: 99%

Portfolio Optimization under Informationally Asymmetric Markets

Kilange¹,

Ananda²,

Ngare³

2023

JMI

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Asymmetric information propagation frequently results in distorted financial markets and is generally a feature of informationally inefficient markets. We developed a model of optimal asset allocation using the martingale method to assist an investor in selecting an asset that performs better under the conditions of a market information cascade. In order to confirm that the model satisfies the required conditions, we applied the verification theorem and ascertained that the results produced were optimal. The model outperformed the famous Markowitz mean-variance type model and was shown to produce stable and consistent solutions under such market conditions.

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On the negative value of information in informationally inefficient markets: Calculations for large number of traders

Cited by 23 publications

References 7 publications

Pascal's Wager and Information

Pascal's Wager and Information

On the Relation between Forecast Precision and Trading Profitability of Financial Analysts

Portfolio Optimization under Informationally Asymmetric Markets

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