Study On Informed Trading And Efficiency Of Information Transmission In China’s Stock Market

Market efficiency research has been the core area of finance&economics. Whileefficiency is not the essential property of capital markets from a microscopic point ofview, it is the consequence of a game between superior informed traders and junioruninformed traders concerning information and price. When asset price is unable toreflect its true value, informed traders holding private information will take actionsaccordingly, thus breaking the original price equilibrium and generating some shocks.However, asset prices will be eventually compelled to approach its fundamental valueuntil the information has been fully reflected. During this process, informed tradingnot only conveys more information but also affects the speed of informationintegration, as several informed traders, especially inside traders, would like toconceal their private information. Actually, information transmission efficiencycontains information integration and its speed. Under the framework of marketmicrostructure theory, this paper probed into the relationship between informedtrading and information transmission efficiency based on the redefinition of informedtraders from the perspective of information asymmetry. Then we investigated howinformed trading affected the information transmission in China’s stock marketthrough empirical studies.Firstly, we decomposed the traditional informed traders into pure insiders andinformation processers, calculated the probabilities of two distinct informed tradingby expanding PIN model with symmetric order flow shock, measured the informationcontent of stock price by R-squared figures from CAPM, and studied what roles thetwo distinct components played in idiosyncratic information transmission viaunbalanced panel regression.Then, considering the influence of market circumstances and informationenvironments in the transmission process, we further explored the conjunction ofinformed trading and private information contents under different marketcircumstances.Next, we used event study methodology to analyze and compare the changes ofinformed trading and the phenomena of price shocks during three typical informationevents happened, and tested whether two components of informed trading couldpromote the enhancement of market efficiency in aspect of the speed of informationintegration.Finally, we summed up the whole paper, and pointed out the present deficiencies and research prospects in the future.