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Finding Alpha through Information Cascade

Last year’s August, Carl Icahn, one of the “big names” in Wall Street suddenly announced that he holds a large amount of Apple’s shares through Twitter. After this news, price of Apple’s shares abruptly increased by almost 6%. The day after, George Soros, another major player in the Wall Street, also announced that he had doubled his position in Apple last quarter. With this news, the price of Apple’s stock broke $500 per share for the first time in 7 months.

Why would such news of big players of Wall Street buying shares of a company significantly affect its stock price? Many would actually rebut this question by saying that its a common sense. The problem comes from the fact that these individuals did not buy Apple’s stocks in the past two days; instead, these news on August 13th and 14th were simply “historical” event that happened several months before. According to Efficient Market Hypothesis (EMH), historical information have already been incorporated in the current stock price, and that only truly new information affects it. It simply argues that the increase in stock price has been temporarily caused by irrational, “noise” traders who have stirred through past’s stale information, and that it will return to its original state.

On the other hand, behavioral economics argues to differ. It says that people under information asymmetry observe “emerging” change in stock price to infer unknown information and modify their beliefs, which is where information cascade comes into play. Now let’s analyze Apple’s case. Apple’s stock had not been doing favorably after Steve Jobs’ death and increasing competition from Samsung. When the news that major players have invested in Apple was announced, common investors who have not been investing in Apple could have judged that these big players have gained a new positive information which would suddenly make Apple a good investing opportunity. This would ultimately mean that, even without a firm data and solely based on the mechanism of information cascade, investors may find short-term profitable investing strategies.

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