Hostname: page-component-848d4c4894-v5vhk Total loading time: 0 Render date: 2024-07-07T00:30:41.637Z Has data issue: false hasContentIssue false
  • English
  • Français

Adverse Selection and Large Trade Volume: The Implications for Market Efficiency

Published online by Cambridge University Press:  06 April 2009

David Easley  and
Maureen O'Hara
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the adverse selection problem that arises from the repeated trades of informed traders. We develop a model of trading that incorporates the interaction of expectations, prices, and volume. We then examine how trading volume affects the speed of price adjustment to information, and demonstrate how this price effect differs across markets. Our results suggest that the efficiency of price adjustment to new information may differ dramatically depending on security market structure, even when there is endogenous entry of informed traders. We illustrate these price adjustment properties by developing a simulation of our theoretical model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 2 , June 1992 , pp. 185 - 208
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (Spring 1988), 3–40.CrossRefGoogle Scholar
Admati, A. R., and Pfleiderer, P.. “Divide and Conquer: A Theory of Intraday and Day-of-the-Week Effects.” Review of Financial Studies, 2 (No. 2, 1989), 189–223.CrossRefGoogle Scholar
Black, F. “Noise.” Journal of Finance, 41 (06 1986), 529–543.CrossRefGoogle Scholar
Burdett, K., and O'Hara, M.. “Building Blocks: An Introduction to Block Trading.” Journal of Banking and Finance, 11 (06 1987), 193–212.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 19 (09 1987), 69–90.CrossRefGoogle Scholar
Foster, F., and Viswanathan, S.. “Interday Variations in Volumes, Spreads, and Variances: I Theory.” Review of Financial Studies, 3 (No. 4, 1990), 593–624.CrossRefGoogle Scholar
Garbade, K., and Lieber, Z.. “On the Independence of Transactions on the New York Stock Exchange.” Journal of Banking and Finance, 1 (10 1977), 151–172.CrossRefGoogle Scholar
Glosten, L., and Milgrom, P.. “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (03 1985), 71–100.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (11 1985), 1315–1335.CrossRefGoogle Scholar
Milgrom, P., and Stokey, N.. “Information, Trade, and Common Knowledge.” Journal of Economic Theory, 26 (02 1982), 17–27.CrossRefGoogle Scholar
O'Hara, M., and Oldfield, G.. “The Microeconomics of Market Making.” Journal of Financial and Quantitative Analysis, 21 (12 1986), 361–376.CrossRefGoogle Scholar
Seppi, D. “Equilibrium Block Trading and Asymmetric Information.” Journal of Finance, 45 (03 1990), 73–94.CrossRefGoogle Scholar