Hierarchical Information and the Rate of Information Diffusion

52 Pages Posted: 21 Mar 2009

See all articles by Yi Xue

Yi Xue

Department of Economics, Simon Fraser University

Ramazan Gencay

Simon Fraser University

Date Written: March 20, 2009

Abstract

The rate of information diffusion and consequently price discovery, is conditional upon not only the design of the market microstructure, but also the informational structure. This paper presents a market microstructure model showing that an increasing number of information hierarchies among informed competitive traders leads to a slower information diffusion rate and informational inefficiency. The model illustrates that informed traders may prefer trading with each other rather than with noise traders in the presence of the information hierarchies. Furthermore, we show that momentum can be generated from the predictable patterns of noise traders, which are assumed to be a function of past prices.

Keywords: Information hierarchies, Information diffusion rate, Momentum

JEL Classification: G10, G11, D43, D82

Suggested Citation

Xue, Yi and Gencay, Ramazan, Hierarchical Information and the Rate of Information Diffusion (March 20, 2009). Available at SSRN: https://ssrn.com/abstract=1365972 or http://dx.doi.org/10.2139/ssrn.1365972

Yi Xue (Contact Author)

Department of Economics, Simon Fraser University ( email )

Burnaby, V5A 1S6
Canada

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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