Hierarchical Information and the Rate of Information Diffusion
52 Pages Posted: 21 Mar 2009
Date Written: March 20, 2009
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: Suggested Citation