The Behavior of Uninformed Investors and Time-Varying Informed Trading Activities

EFMA 2002 London Meetings

40 Pages Posted: 7 Nov 2001

See all articles by Qin Lei

Qin Lei

University of Michigan at Ann Arbor

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: December 17, 2001


Building upon the seminal work of Easley, Kiefer, O'Hara and Paperman (1996), we develop a framework to investigate the relationship between the behavior of uninformed investors and the time-varying informed trading activities. We allow the arrival rates for uninformed traders to follow a Markov switching process where the transition probabilities depend on market fundamentals. Informed traders may match the level of the uninformed arrival rate with certain probability so as to make better use of the camouflage provided by the uninformed transactions.

Our empirical estimation of NYSE stocks shows that the uninformed transition probabilities are indeed time-varying, so is the probability of information content. The estimated probability of information content predicts the opening, median and closing spreads. There is evidence that uninformed investors exhibit momentum chasing and "noise herding" behavior. There is also a positive "market spillover" effect in the uninformed trading activities. We find that the "clustering" of trading activities by uninformed and informed traders seem to be more likely on low volume days, and the uninformed trading activities are responsible for most of the stock trading volatilities.

Suggested Citation

Lei, Qin and Wu, Guojun, The Behavior of Uninformed Investors and Time-Varying Informed Trading Activities (December 17, 2001). EFMA 2002 London Meetings, Available at SSRN: or

Qin Lei

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States


Guojun Wu (Contact Author)

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)


China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030

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

Paper statistics

Abstract Views
PlumX Metrics