Trading, fast and slow: who incorporates information into financial asset prices?
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2024-04-23
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Chague, Fernando Daniel
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The efficient markets hypothesis suggests that financial asset prices adjust rapidly to new information, which can be attributed to a group of well-informed investors who trade based on news developments. However, the specific characteristics of these investors remain somewhat unclear. This paper proposes a novel metric, institutional trading frequency, as a significant variable for understanding institutions’ capabilities in pricing news. Drawing on a comprehensive database covering all entities operating within the Brazilian stock exchange, we identify a subset of institutions demonstrating an intermediate trading frequency which appears to be significantly well-informed. These institutions display a notable ability to interpret and act upon various types of news announcements. Their active trading behaviour effectively addresses mispricing associated with quarterly earnings surprises, thereby mitigating the post-earnings-announcement drift puzzle, and accurately anticipates market sentiment surrounding material facts releases. Furthermore, their presence in the market correlates with an improvement in price efficiency.