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The stealth trading hypothesis asserts that cumulative price changes are due to medium size trades. Using data for the Tokyo Stock Exchange, a pure order-driven market, we find evidence to support this hypothesis. This result is consistent with previous research on a hybrid market, the NYSE. However, we also find that small trades contribute significantly to cumulative price changes. Our analysis suggests that combining positive and negative price changes can obscure the effect of trade size on cumulative price change. By separately considering positive and negative price changes we demonstrate that small trades make the largest contribution to price change. Therefore, in an order-driven market stealth traders appear to use smaller trades. We also find that larger trades explain a greater portion of the cumulative price change on high volatility days. This demonstrates that stealth trading is more difficult when volatility is high, therefore forcing informed traders to trade more quickly using larger trades. 2 I.

We use network analysis to quantify the flow of information through financial markets. Using unique ultra high frequency data, we compute network and financial variables for transactions that occured during August 2008 in the nearby E-mini S&P 500 futures contract – the cornerstone of price discovery for the S&P 500 Index. We find that network variables presage the information represented by financial variables. Most notably, we find that network variables strongly Granger-case intertrade duration and trading volume, suggesting that network metrics serve as primitive measures of information flow. Finally, we find that the dynamics of returns and volatility are rooted in the network mechanics of the information arrival process – as evidenced both in our data and the results of an agent-based simulation model.

This paper examines the Post Keynesian proposition that the forward rate is determined by covered interest parity and that it is not a predictor of the future spot rate as suggested by the unbiased effeiciency hypothesis. One implication of the failure of unbiased effeciency is that it leads to the faliure of real interest parity, implying that the monetary authorities can control interest rates in an open economy. An extensive set of econometric tests is used to demonstrate that the spot-forward relationship is indeed contemporaneous rather than lagged, which corroborates the Post Keynesian view. 2

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, the better than average effect, illusion of control, unrealistic optimism). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. The results hold even when we control for several other determinants of trading volume in a cross-sectional regression analysis. In connection with other recent findings, we conclude that the usual way of motivating and modelling overconfidence which is mainly based on the calibration literature has to be treated with caution. We

The authors thank HEX Plc for providing data from the Finnish Central Share

professional traders

Following extensive empirical evidence about “market anomalies ” and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention. However, all these models consider agents trading for their own account. In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident. We consider several situations. In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

We study brokerage account data from China to study investing behavior and trading performance in an emerging market. Chinese stock markets are new, so we assume that Chinese investors are less experienced about investing as compared to investors from more capitalistic oriented societies. We find that Chinese investors exhibit behavioral biases (i.e., they seem overconfident, inclined toward a disposition effect, and exhibit representativeness bias) and make poor trading decisions. We then propose five measures of investor experience where (1) investors who have accumulated some investing experience, (2) younger investors, (3) active investors, (4) investors with more wealth, and (5) investors from the more cosmopolitan Chinese cities, are assumed to be more sophisticated about investing than other Chinese investors. We find strong evidence that more experienced investors are more inclined toward making trading mistakes, exhibiting the disposition effect, and suffering from representativeness bias. We find mixed evidence that experience mitigates overconfidence. Overall, we conclude that investor sophistication does not necessarily mitigate behavioral biases, nor improve trading performance. JEL classification: G10

This paper examines implications from boundedly rational agents models, by investigating the relation between returns following earnings announcements (post-earnings announcement drift) and divergence of opinions among investors. We proxy for divergent opinions with the quantity of volume at the earnings date that is unexpected. Post-announcement returns are increasing in unexpected volume. Our evidence is consistent with Varian (1985) who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.