Buy on rumours - sell on news: a manipulative trading strategy

Brunnermeier, Markus (1998) Buy on rumours - sell on news: a manipulative trading strategy. Financial Markets Group Discussion Papers (309). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

A trader who receives a signal about a future public announcement can exploit this private information twice. First, when he receives his signal, and second, at the time of the public announcement. The second round advantage occurs because the early-informed trader can best infer the extent to which his information is already reflected in the current price. This paper shows that early-informed traders trade very aggressively at the time they receive their signal. They try to manipulate the price in order to enhance their informational advantage at the time of the public announcement. In addition, they speculate by building up a position in period one, which they partially unwind 'on average' in period tow. The analysis shows that informational leakage makes prices prior to public announcements more informative but reduces informational efficiency in the long run.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1998 The Author
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	04 Jul 2023 14:42
Last Modified:	14 Sep 2024 04:34
URI:	http://eprints.lse.ac.uk/id/eprint/119135

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