The Impact of Information Barriers on Financial Asset Price Discovery: A Theoretical Analysis Based on Information Asymmetry and Behavioural Finance

Shuai Zhang

Abstract

With the development of digital finance and high-frequency trading in recent years, the information asymmetry between institutions and individual investors has gradually grown, and the problems caused by this phenomenon have become more serious. Based on information asymmetry theory, the efficient market hypothesis and behavioural finance theory, this paper studies how information barriers affect the discovery of financial asset prices and build a theoretical system for this purpose. A concept and analysis were employed in the study to investigate the path of "information barriers - information diffusion - investor behaviour - price formation". The results indicate that information barriers reduce both the speed and quality of information diffusion, thus leading to a delay in the integration of information into asset prices. Investors are not all the same and are also boundedly rational; therefore, the market will fluctuate more readily. Generally speaking, institutional investors have better information and are more likely to trade early, while retail investors are more prone to herd behaviour and overreaction. As a result, the combined effect has reduced the efficiency of price discovery, increased short-term fluctuations in prices, and deviated from the value of assets. This study is mainly in a theoretical form, has not been empirically verified, and has failed to consider other factors that affect the results, such as liquidity conditions and different regulations. In the future, based on the limitations of the above, empirical studies can be conducted using high-frequency or cross-market data and more market microstructure variables added to expand the analytical system.

Source: semanticscholar · PDF

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