Seminar 217, Risk Management: The Implication of Information Network in Market Quality and Market Reaction to Public Announcements
Seminar: Risk Seminar | April 30 | 11 a.m.-12:30 p.m. | 1011 Evans Hall
Speakers: Senyang Zhao, SWUFE
This research studies the role of information network in market quality and market reaction to public announcements. We propose in this article a three-period rational noisy expected equilibrium model by taking both public and private information into account with an embedded information network structure among market traders. Closed form expressions for market reaction and market quality are derived as a function of topological structure of the network and several novel results are revealed. The trading volume and price change have different responses to network connectedness. As network connectedness increases, there is a downward trend for price change. The downward trend are decreasing which reﬂects that the market eﬃciency can not increase to inﬁnite in reality. However, the change of trading volume is uncertain because it depends on two attributes of the network, the uniformity and connectedness, it is hard to compare which one dominate another one. To the market quality, the information precision can increase market liquidity, market eﬃciency and decrease the cost of capital, network connectedness plays the same role in market eﬃciency and cost of capital, while it has a non-monotone inﬂuence towards market liquidity. And also network will suppress the eﬀect caused by disclosure.