Advertisement

Mathematics and Financial Economics

, Volume 6, Issue 3, pp 249–259 | Cite as

Informational inefficiency in financial markets

  • Dorje C. Brody
  • Bernhard K. Meister
  • Matthew F. Parry
Article

Abstract

The existence of an informational inefficiency in the equity market is identified by analysing information publicly available on the internet. A large volume of blog data is used for this purpose. Informational inefficiency is established by converting company-specific blog sentiment data into a trading strategy and analysing its performance. An information-based model that approximately replicates the strategy is developed to estimate the degree of information disparity. The result shows that an efficient internet search engine can considerably enhance market efficiency, as measured in terms of the information flow rate.

Keywords

Information-based asset pricing Statistical arbitrage Internet-data extraction Information pricing 

JEL Classification

G14 G15 G17 C11 C53 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Amendinger J., Becherer D., Schweizer M.: A monetary value for initial information in portfolio optimization. Financ. Stoch. 7, 29–46 (2003)MathSciNetzbMATHCrossRefGoogle Scholar
  2. 2.
    Andersen T., Bollerslev T., Diebold F.X., Vega C.: Real-time price discovery in stock, bond and foreign exchange markets. J. Int. Econ. 73, 251–277 (2007)CrossRefGoogle Scholar
  3. 3.
    Back, K.: Insider trading in continuous time. Rev. Financial Stud. 5, 387–409 (1992)Google Scholar
  4. 4.
    Baudoin, F.: Modelling anticipations on financial markets. In: Carmona, R.A., Çinlar, E., Ekeland, I., Jouini, E., Scheinkman, J.A., Touzi, N. (eds.) Paris–Princeton lectures on mathematical finance 2002, pp. 43–94. Springer, Berlin (2003)Google Scholar
  5. 5.
    Baudoin F., Nguyen-Ngoc L.: The financial value of a weak information on a financial market. Financ. Stoch. 8, 415–435 (2004)MathSciNetzbMATHCrossRefGoogle Scholar
  6. 6.
    Biagini F., Øksendal B.: A general stochastic calculus approach to insider trading. Appl. Math. Optim. 52, 167–181 (2005)MathSciNetzbMATHCrossRefGoogle Scholar
  7. 7.
    Bollen J., Mao H., Zeng X.-J.: Twitter mood predicts the stock market. J. Comput. Sci. 2, 1–8 (2011)CrossRefGoogle Scholar
  8. 8.
    Brody, D.C., Brody, J., Meister, B., Parry, M.F.: Outsider trading. arXiv:1003.0764 (2010)Google Scholar
  9. 9.
    Brody D.C., Davis M.H.A., Friedman R.L., Hughston L.P.: Informed traders. Proc. R. Soc. Lond. A 465, 1103–1122 (2009)MathSciNetzbMATHGoogle Scholar
  10. 10.
    Brody, D.C., Law, Y.T.: Asset pricing with random information flow. arXiv:1009.3810 (2010)Google Scholar
  11. 11.
    Brody, D.C., Law, Y.T.: Theory of information pricing. arXiv:1106.5706 (2011)Google Scholar
  12. 12.
    Brody, D.C., Hughston, L.P., Macrina, A.: Beyond hazard rates: a new framework for credit-risk modelling. In: Elliott, R., Fu, M., Jarrow, R., Yen, J.-Y. (eds.) Advances in mathematical finance: Festschrift Volume in Honour of Dilip Madan. Birkhäuser, Basel (2007)Google Scholar
  13. 13.
    Brody D.C., Hughston L.P., Macrina A.: Information-based asset pricing. Int. J. Theor. Appl. Financ. 11, 107–142 (2008)MathSciNetzbMATHCrossRefGoogle Scholar
  14. 14.
    Brody, D.C., Hughston, L.P., Macrina, A.: Modelling information flows in financial markets. In: Di Nunno, G., Øksendal, B. (eds.) Advanced mathematical methods for finance, pp. 133–153. Springer, Berlin (2011)Google Scholar
  15. 15.
    Brown, A.A., Rogers, L.C.G.: Diverse beliefs. arXiv:1001.1450 (2010)Google Scholar
  16. 16.
    Engle R.F., Ng V.K.: Measuring and testing the impact of news on volatility. J. Financ. 48, 1749–1778 (1993)CrossRefGoogle Scholar
  17. 17.
    Feldman R., Sanger J.: The text mining handbook. Cambridge University Press, Cambridge (2007)Google Scholar
  18. 18.
    Föllmer H., Wu C.-T., Yor M.: Canonical decomposition of linear transformations of two independent Brownian motions motivated by models of insider trading. Stoch. Process. Appl. 84, 137–164 (1999)zbMATHCrossRefGoogle Scholar
  19. 19.
    Grossman S.J., Stiglitz J.E.: On the impossibility of informationally efficient markets. Am. Econ. Rev. 70, 393–408 (1980)Google Scholar
  20. 20.
    León J.A., Navarro R., Nualart D.: An anticipating calculus approach to the utility maximization of an insider. Math. Financ. 13, 171–185 (2003)zbMATHCrossRefGoogle Scholar
  21. 21.
    Wiener N.: The human use of human beings, Revised edition. Eyre and Spottiswoode, London (1954)Google Scholar

Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  • Dorje C. Brody
    • 1
  • Bernhard K. Meister
    • 2
  • Matthew F. Parry
    • 3
  1. 1.Mathematical SciencesBrunel UniversityUxbridgeUK
  2. 2.Department of PhysicsRenmin University of ChinaBeijingChina
  3. 3.Department of Mathematics and StatisticsUniversity of OtagoDunedinNew Zealand

Personalised recommendations