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RFS Advance Access published online on February 10, 2005
Review of Financial Studies, doi:10.1093/rfs/hhi015
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The Review of Financial Studies © The Author 2005. Published by Oxford University Press on behalf of the Society of for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Original Articles

Information Leakage and Market Efficiency

Markus K. Brunnermeier 1*
1 Princeton University, Bendheim Center for Finance, 26 Prospect Avenue, Princeton, NJ 08540-5296

* To whom correspondence should be addressed.
Markus K. Brunnermeier, E-mail: markus{at}princeton.edu


  Abstract

This paper analyzes the effects of information leakage on trading behavior and market efficiency. A trader who receives a noisy signal about a forthcoming public announcement can exploit it twice. First, when he receives it, and second, after the public announcement since he knows best the extent to which his information is already reflected in the pre-announcement price. Given his information he expects the price to overshoot and intends to partially revert his trade. While information leakage makes the price process more informative in the short-run, it reduces its informativeness in the long-run. The analysis supports SEC's Regulation FD.


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