We find that accruals mispricing is more pronounced for stocks with higher level of probability of informed trading (PIN). We interpret it as the evidence of informed traders using their proprietary information on accruals quality to trade against average investors. The informed traders’ arbitrage generates an annualized size and book-to-market adjusted abnormal return of 19.81% over the 1993-2...

The question of how useful information in financial markets is has been discussed for decades and is still unresolved. In this paper we challenge the widely held belief that success and failure in the stock market can largely be attributed to the information underlying the trading decisions. We present a dynamic multi-period experimental financial market with asymmetrically informed traders who...

To prove their Walrasian equilibrium existence theorem, Arrow and Debreu (1954) devised an abstract economy that Shapley and Shubik (1977) cricitized as a market game because, especially with untrustworthy traders, it fails to determine a credible outcome away from equilibrium. All this earlier work also postulated a Walrasian auctioneer with complete information about traders’ preferences and ...

We present a model of predatory traders interacting with each other in the presence of a central reserve (which dissipates their wealth through say, taxation), as well as inflation. This model is examined on a network for the purposes of correlating complexity of interactions with systemic risk. We suggest the use of selective networking to enhance the survival rates of arbitrarily chosen trade...

This paper presents a search model of centralized and decentralized trade. In a centralized market, trades are intermediated by market makers at publicly posted bidask prices. In a decentralized market, traders search counterparties. Prices are negotiated and transactions are conducted in private meetings among traders. Traders can choose which market to enter. The determinant of bid-ask spread...

Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is sufficiently high. Negative knock-on is possible when the elasticity is low. Enforcement strategies in c...

We propose a simple model of prediction markets in which traders with heterogeneous prior beliefs and private information are allowed to risk a limited amount of money. For any given information realization, the equilibrium price can be interpreted as a posterior belief given a representative market prior belief. However, across information realizations, we show that this market prior belief is...

We show that firm-level short interest predicts negative returns for individual stocks during economic expansions, while aggregate short interest predicts negative market returns during recessions. Viewing short sellers as informed traders, these findings are consistent with Kacperczyk, Van Nieuwerburgh, and Veldkamp’s (2016) model in which rational yet cognitively constrained traders optimally...

This paper is devoted to the question of whether traders can learn rational expectations from repeated observations of market data in a stationary environment with finitely many exogenous states of the world. The learning problem is placed in the context of an iterative adjustment process which achieves equilibrium if traders have rational expectations. The main result is that even if traders b...

What happens when uninformed investors trade stocks via mobile phones? Do they react to social sentiment differently than more informed traders in traditional trading? Based on 16,817 data observations and econometric analysis for the trading of 251 equities in Korea over 39 days, we present evidence of herding behavior among uninformed traders in the mobile channel. The results indicate that m...