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SUMMARY:Do empirical (high and low frequency) measures of price impact cap
 ture informed trading? - Collin-Dufresne\, P (cole Polytechnique)
DTSTART:20131120T090000Z
DTEND:20131120T095000Z
UID:TALK48922@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Co-author: Vyacheslav Fos (University of Illinois at Urbana Ch
 ampaign) \n\nThis talk is based on two papers. \n\nThe first paper ("Do pr
 ices reveal the presence of informed trading?") tests empirical measures o
 r price impact. Using a comprehensive sample of trades by Schedule 13D fil
 ers\, who possess valuable private information when they accumulate stocks
  of targeted companies\, this paper studies whether several empirical (hig
 h and low frequency) measures of adverse selection reveal the presence of 
 informed trading. The evidence suggests that on days when Schedule 13D fil
 ers accumulate shares\, both high-frequency and low-frequency measures of 
 stock liquidity and adverse selection indicate higher stock liquidity and 
 lower adverse selection\, even though prices are positively a ected. We do
 cument three channels that help explain this phenomenon: (a) informed trad
 ers select times of higher liquidity when they trade\, (b) liquidity incre
 ases in response to informed traders' trades\, (c) informed traders use li
 mit orders. \n\nThe second paper ("Insider Trading\, Stochastic Liquidity 
 and Equilibrium Prices") proposes a theoretical model to explain the empir
 ical findings. In that paper\, we extend Kyle's (1985) model of insider tr
 ading to the case where liquidity provided by noise traders follows a gene
 ral stochastic process. Even though the level of noise trading volatility 
 is observable\, in equilibrium\, measured price impact is stochastic. If n
 oise trading volatility is mean-reverting\, then the equilibrium price fol
 lows a multivariate stochastic volatility `bridge' process. More private i
 nformation is revealed when volatility is higher. This is because insiders
  choose to optimally wait to trade more aggressively when noise trading vo
 latility is higher. In equilibrium\, market makers anticipate this\, and a
 djust prices accordingly. In time series\, insiders trade more aggressivel
 y\, when measured price impact is lower. Therefore\, aggregate execution c
 osts to uninformed traders can be higher when price impact is lower. The m
 odel provides some guidance about how to improve existing empirical measur
 es of adverse selection.\n\n
LOCATION:Seminar Room 2\, Newton Institute Gatehouse
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