Price and Volume Reactions to Public Information Releases: An Experimental Approach Incorporating Traders' Subjective Beliefs

Posted: 7 Apr 2000

See all articles by Ann B. Gillette

Ann B. Gillette

Kennesaw State University - Michael J. Coles College of Business; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Douglas E. Stevens

Georgia State University - Robinson College of Business

Susan G. Watts

Purdue University

Arlington W. Williams

Indiana University Bloomington - Department of Economics

Abstract

This paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long-lived financial asset. The objective is to study deviations from the symmetric information risk-neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash-motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices underreacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. 43 percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short-term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.

JEL Classification: D40, D82, D84, G12, G14, M41, C91

Suggested Citation

Gillette, Ann Brewer and Stevens, Douglas E. and Watts, Susan G. and Williams, Arlington W., Price and Volume Reactions to Public Information Releases: An Experimental Approach Incorporating Traders' Subjective Beliefs. Available at SSRN: https://ssrn.com/abstract=219133

Ann Brewer Gillette

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Douglas E. Stevens (Contact Author)

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

Susan G. Watts

Purdue University ( email )

Department of Accounting
West Lafayette, IN 47907-1310
United States
765-494-4504 (Phone)
765-496-1778 (Fax)

Arlington W. Williams

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
Bloomington, IN 47405-6620
United States
812-855-4564 (Phone)
812-855-3736 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,917
PlumX Metrics