Information Acquisition in Ostensibly Efficient Markets

Alasdair Brown
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Alasdair Brown: University of East Anglia

No 43, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: I use U.K. betting exchange data on Wimbledon tennis matches to investigate the Grossman and Stiglitz (1980) paradox. Risk-free arbitrage opportunities arise frequently during matches (as information arrives and asynchronously shifts prices), but seldom arise before matches (when there is little information to move prices). I find that on the few occasions that arbitrage opportunities do arise before matches, they last substantially longer than average. This suggests, in line with the paradox, that traders neglect to acquire information (i.e. carry out research, or watch markets) if they believe that markets are already efficient. This neglect, in turn, makes markets inefficient.

Date: 2013-04
New Economics Papers: this item is included in nep-cta and nep-mst
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