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THE SPEED OF ADJUSTMENT OF PRICES TO PRIVATE INFORMATION: EMPIRICAL TESTS

Authors


  • We appreciate the helpful comments of an anonymous referee, Sunho Kim, David Mayers, Charles Moyer, Sangsoo Park, Charles Trzcinka, Larry Brown, Frank Jen, and Robert Hagerman.

Abstract

We estimate speeds of adjustment of individual stock prices to private information using daily data. We use a model in which private information gives rise to return variance and private information decays linearly over time. We find that, on average, about 85 percent to 88 percent of private information is incorporated into prices within one trading day, with variation depending upon the stock's trading volume and whether the stock is listed on an exchange. The findings support strong form market efficiency.

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