Topic: Homo Economics in an Imperfect World: A Dynamic Model of Feedback Trading with Market Deviations

Speaker: Xiaoquan (Michael) Zhang, Associate Professor of Information System, Business Statistics and Operations Management, Hong Kong University of Science and Technology

Date: September 23th (Wed.)

Time: 10:00-11:30am  

Location: Building 4, Room 101

Language: English

Abstract:

This paper proposes a new way to relax the Efficient Market Hypothesis (EMH). We assume the existence of some market deviations and use a continuous-time model to study feedback trading. Without making assumptions of cognitive biases, the model is able to offer some insights on the interactions between market participants when the market is not always efficient. We show that a market deviation is the necessary condition for feedback trading to influence market efficiency. Compared to a market without deviations, information gets incorporated into price more slowly. Positive feedback makes the market more efficient, but at the same time allows higher insider expected profit. Negative feedback induces lower market efficiency, and is more detrimental to market stability. Since our rational-expectations framework does not assume any form of market efficiency, it is possible to endogenously generate bubbles and crashes from the model.

About the speaker:

Xiaoquan (Michael) Zhang is Associate Professor of Information System, Business Statistics and Operations Management, Hong Kong University of Science and Technology. Professor Zhang received a MSc. in Management from Tsinghua University in 1999, and a Ph.D. in Management from Massachusetts Institute of Technology in 2006. His current research interests are Entrepreneurship and Innovation, IT in Financial Markets and Social media. His papers have appeared in Journal of Interactive Marketing, American Economic Review, MIS Quarterly, Management Science and other leading finance journals.