Quantitative Investing and Price Informativeness

40 Pages Posted: 20 Apr 2022 Last revised: 13 May 2022

See all articles by Xuezhong He

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Junqing Kang

Lingnan College, Sun Yat-sen University

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management

Date Written: May 13, 2022

Abstract

With imperfect price interpretation, quantitative investing — trading strategies based on the information extraction from quantitative analysis of price — can affect price informativeness through two distinct economic mechanisms. Directly, it brings more informed capital with superior price information. Indirectly, due to common error in institution’s price-processing, imperfect price interpretation injects systematic noise into equilibrium outcomes. Given exogenous fund market structure, relatively high investors’ capital flows to quantitative funds can make the indirect effect dominate, reducing price informativeness. In an equilibrium with endogenous determined fund market structure, apart from inducing more capital flows to quantitative funds, lowering price information further motivates the formation of quantitative funds. This endogenous strategy-crowding makes noise information interpretation become more correlated, distorting information aggregation and demoting price informativeness. An improvement in information processing capacity might relieve the problem.

Keywords: Institutionalization, information efficiency, imperfect price interpretation

JEL Classification: D4, D53, D83, G02, G12, G14, G23, L10

Suggested Citation

He, Xue-Zhong 'Tony' and Kang, Junqing and Zhou, Xuan, Quantitative Investing and Price Informativeness (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=4079713 or http://dx.doi.org/10.2139/ssrn.4079713

Xue-Zhong 'Tony' He

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Junqing Kang (Contact Author)

Lingnan College, Sun Yat-sen University ( email )

No. 135, Xingang Xi Road
Haizhu District
Guangzhou, Guangdong 510275
China
+8613617319162 (Phone)

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management ( email )

China

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