Market Efficiency in the Age of Machine Learning
61 Pages Posted: 2 Mar 2021 Last revised: 15 Sep 2021
Date Written: March 24, 2021
As machines replace humans in financial markets, how is informational efficiency impacted? We shed light on this issue by exploiting a unique data-set that allows us to identify when machines access important company information (8-K filings) versus when humans access the same information. We find that increased information access by cloud computing services significantly improves informational efficiency and reduces the price drift following information events. We address identification through exogenous power and cloud outages, a quasi-natural experiment, and instrumental variables. We show that machines are better able to handle linguistically complex filings, less susceptible to bias from negative sentiment and less constrained in attention/processing capacity than humans.
Keywords: Market efficiency; Information acquisition; Machine learning; Informed trading; Algorithmic trading
JEL Classification: G10; G12; G14
Suggested Citation: Suggested Citation