Velocity of Information in Efficient Markets: A Theory of Market Value Change

Posted: 13 Nov 2015

See all articles by Holly Bell

Holly Bell

University of Alaska Anchorage, Matanuska-Susitna College

Date Written: September 1, 2012

Abstract

This article argues that market prices in contemporary financial markets are driven by the value of information multiplied by a factor of the information’s velocity. These factors combined have the potential to explain several observed market phenomenon, including market volatility during economic crisis or recession, market bubbles, flash crashes, and short-run volatility combined with overreactions and over-corrections. The theory considers both micro and macroeconomic information, and questions the assumption that market prices always reflect intrinsic value alone. While microeconomic information is helpful in determining a security’s intrinsic value relative to other securities, macroeconomic information impacts the aggregate market. The result of our contemporary high-velocity information environment suggests our financial markets are becoming informationally hyperefficient and quasi-rational. This hyperefficiency has the potential to create short-run volatility on a scale not previously experienced.

Keywords: velocity of information, financial markets, microeconomics, macroeconomics, market efficiency, market prices, volatility

JEL Classification: D81, E44, G12, G14,

Suggested Citation

Bell, Holly, Velocity of Information in Efficient Markets: A Theory of Market Value Change (September 1, 2012). Journal of Investing, Vol. 21, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2689324

Holly Bell (Contact Author)

University of Alaska Anchorage, Matanuska-Susitna College ( email )

AK
United States

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