On the Information Content of the Order Flow: An Experiment

35 Pages Posted: 13 Oct 2008

See all articles by Christophe Bisiere

Christophe Bisiere

Universite de Toulouse - (IDEI - CRG)

Jean-Paul Decamps

University of Toulouse 1 - Toulouse School of Economics (TSE)

Stefano Lovo

HEC Paris - Finance Department

Date Written: October 10, 2008

Abstract

We report results of a series of experiments that simulates trading in financial market. The specific format of our experiment allows to unambiguously measure the information content of the order flow and to disentangle the impact that risk attitudes and belief updating rules have on market informational efficiency. On the one hand, we show that many of the so called "irrational" behaviors are not so if one takes into account subjects' risk attitude. On the other hand we find evidence of non-Bayesian updating of beliefs. Risk neutral subjects are rare and subjects displaying risk aversion or risk loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. This behavior implies that when the market has a sharp opinion on an asset fundamental value, the private information dispersed in the economy struggles to enter trading prices. Non-Bayesian belief updating has an ambiguous effect on market efficiency as it reduces (improves) the information flow when subject prior belief is weak (strong).

Suggested Citation

Bisiere, Christophe and Decamps, Jean-Paul and Lovo, Stefano, On the Information Content of the Order Flow: An Experiment (October 10, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI, Available at SSRN: https://ssrn.com/abstract=1282165 or http://dx.doi.org/10.2139/ssrn.1282165

Christophe Bisiere (Contact Author)

Universite de Toulouse - (IDEI - CRG) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France

Jean-Paul Decamps

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
France

Stefano Lovo

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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