Quantitative Investing and Price Informativeness
40 Pages Posted: 20 Apr 2022 Last revised: 13 May 2022
Date Written: May 13, 2022
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: Suggested Citation