The New Measure Of Probability Of Informed Trading And Its Application In Mispricing

When investors participate in trading in financial markets,they will be faced with the problem of information asymmetry.For the stock market,information asymmetry of the stock market will influence the market in two ways.On the one hand,the investors who own the information advantage can help the stock's price change towards the stock's intrinsic value when they are trading stocks by utilizing their information that related to the stock's intrinsic value.On the other hand,the investors who own the information disadvantage may lead the stock's price deviating from the stock's intrinsic value when they are trading stocks.At the same time,it will increase the volatility of stock' price and reduce the effectiveness of the stock market.It can be seen that in the stock market,information asymmetry will have certain effect on asset pricing in the stock market.In this paper,according to the characteristics of the ability of information acquisition of the informed traders,I extend the classical EKOP model and obtain the EKOP extension model.Then,using the probability of informed trading as the measure of information,asymmetry,I study the effect of probability of informed trading on the stock's mispricing.Here are the results.First,there exists the non-liner quadratic relationship between the probability of informed trading and the stock's mispricing.And as the probability of informed trading increases,the stock's mispricing will increase initially and decrease afterwards.Second,as the probability of informed trading that based on bad news or good news increases,the stock's mispricing tends to increase initially and decrease afterwards.And the informed trading based on bad news is more likely to influence the stock's mispricing than the informed trading based on good news.Third,the immediate informed trading can help decrease the stock's mispricing.And the stock's mispricing tends to decrease when there is appropriate amount of lagging informed trading,but it tends to increase when there is too much lagging informed trading.