Quantitative Investing and Price Informativeness

41 Pages Posted: 20 Apr 2022 Last revised: 15 Aug 2023

See all articles by Xuezhong He

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Junqing Kang

Sun Yat-sen University (SYSU) - Lingnan (University) College

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management

Date Written: August 15, 2023

Abstract

We study, using a noisy rational expectations framework, how quantitative funds with superior access to price information but imperfect price interpretation affects price informativeness. Quantitative investing, on the one hand, brings more informed capital with superior price information, on the other hand, injects systematic noise into equilibrium outcomes due to common errors in the price processing. In a highly institutionalized market, the imperfect price interpretation of extra institutional money not only directly injects systematic noise but also indirectly confuses other institutions through their price interpretation, which further feedback to the trades of each institution through their demand and noise price interpretation. Hence, the price informativeness could decreases with institutionalization. In an equilibrium with an endogenously determined fund market structure, apart from inducing more capital flows to quantitative funds, lowering price information further motivates the formation of quantitative funds. This endogenous strategy-crowding makes noise information interpretation more correlated, distorting information aggregation and demoting price informativeness.

Keywords: Institutionalization, information efficiency, imperfect price interpretation

JEL Classification: D4, D53, D83, G02, G12, G14, G23, L10

Suggested Citation

He, Xue-Zhong 'Tony' and Kang, Junqing and Zhou, Xuan, Quantitative Investing and Price Informativeness (August 15, 2023). Available at SSRN: https://ssrn.com/abstract=4079713 or http://dx.doi.org/10.2139/ssrn.4079713

Xue-Zhong 'Tony' He

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
, Lake Science and Education Innovation District
Suzhou, JiangSu province 215123
China

Junqing Kang (Contact Author)

Sun Yat-sen University (SYSU) - Lingnan (University) College ( email )

No. 135, Xingang Xi Road
Haizhu District
Guangzhou, Guangdong 510275
China
+8613617319162 (Phone)

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management ( email )

China

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