Does High-Frequency Trading Cause Stock Prices to Deviate from Fundamental Values?

Accounting and Business Research, Forthcoming

61 Pages Posted: 14 Sep 2023

See all articles by Michael J. Jung

Michael J. Jung

University of Delaware - Alfred Lerner College of Business and Economics

Kyung Yoon Kwon

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Hyungshin Park

Kennesaw State University - Michael J. Coles College of Business

Date Written: September 11, 2023

Abstract

We examine whether high-frequency trading (HFT) is associated with greater deviations of stock prices from firms’ fundamental, intrinsic values. Prior studies show that HFT can improve market liquidity and price discovery in the short-term, but countervailing effects can discourage new information acquisition, reduce the amount of fundamental news reflected in stock prices, and reduce institutional investors’ desire to invest and trade in stocks subject to high levels of HFT. We find that greater HFT leads to a greater deviation of stock prices from accounting-based valuation estimates. The results hold across univariate, multivariate, and cross-sectional tests, as well as a natural experiment that induces an exogenous shock to HFT for a small sample of firms. Our findings contribute to the understanding of the longer-term valuation implications of HFT, as well as the traditional valuation role of accounting variables.

Keywords: high-frequency trading, accounting-based valuation, fundamental value, stock prices

JEL Classification: G12, G14, M40, M41

Suggested Citation

Jung, Michael J. and Kwon, Kyung Yoon and Park, Hyungshin, Does High-Frequency Trading Cause Stock Prices to Deviate from Fundamental Values? (September 11, 2023). Accounting and Business Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4568645 or http://dx.doi.org/10.2139/ssrn.4568645

Michael J. Jung (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

221 Purnell Hall
Newark, DE 19716
United States

Kyung Yoon Kwon

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)

Hyungshin Park

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

1000 Chastain Road
Kennesaw, GA 30144
United States

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