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Information Diffusion and Price Formation in Equity Markets: Empirical Analysis of Trading Networks

People

 

Franzoni F.

(Responsible)

Barbon A.

(Collaborator)

Abstract

In an ideal world, market prices perform the crucial role of giving an unbiased assessment of the value of an asset. However, recent events, such as the last financial crisis, suggest that prices can fail dramatically to reflect fundamental valuations. This failure has severe implications for the real economy as resources are allocated to the wrong investment projects. Booms and busts can follow from this misallocation of capital. It seems therefore of utmost importance to shed new light on the process of price formation in financial markets. The interconnectedness of the actors and institutions within financial markets suggests that network analysis can prove a useful tool in studying information diffusion even in a centralized exchange, such as the equity market. Hence, the proposal is articulated into four empirical projects that study equity transactions data using a network framework. Project 1: The role of the network of brokers in spreading private information and, eventually, leading to efficient (or inefficient) asset valuations. Project 2: Do brokers discriminate against some investors to the advantage of others in trading networks? Project 3: How do informed traders react to the presence of short sellers in the market? Project 4: Identifying vulnerabilities in the network of arbitrageurs and market makers at times of intense market stress (e.g. the Flash Crash).Overall, this empirical research agenda aims at identifying critical points in the structure of financial markets that foster or hinder efficient price formation. The other important goal is to study whether some actors can extract informational rents at the expense of other market participants distorting the incentive to produce information. The ultimate purpose of this research program is to provide regulators with useful insights for designing more efficient and fairer financial markets.

Additional information

Start date
01.10.2017
End date
31.01.2022
Duration
52 Months
Funding sources
SNSF
Status
Active
Category
Swiss National Science Foundation / Project Funding / Division I - Humanities and Social Sciences

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