“When the market is working efficiently, this makes the lives of the people involved in the market easier,” says Assistant Professor Guner Velioglu.
Market efficiency has immediate impact on people and businesses, says Assistant Professor Guner Velioglu. In efficient markets, the price for an asset should reflect all available information. But private, or non-public, information can play a role in both corporate decisions and pricing, leading to an appearance of “stickiness” where prices don’t appear to change as much as expected based on public information.
In his research, Velioglu teases out just how big of a role this private information can play and what effects it can have on prices and everyone involved.
Below, he details his findings and how his research enlivens his teaching.
What is the focus of your research?
Broadly speaking, I focus on the impact of private information on corporate decisions and asset prices. For the welfare of all, it is important that goods and services are priced fairly. If prices are not fair, at least one party in the transaction will suffer. In this context, fairness is measured by the extent at which prices effectively incorporate information. For example, if unexpected news about a company arise, asset prices should react accordingly and reflect the news. If they don’t, it suggests that there may be undisclosed private information at play.
Generally, private information is information that is only available to a subset of investors. For example, when a bank extends a commercial loan to a company, it screens and monitors the borrower company and because of this, gets information that the public does not have.
What did your research discover about “stickiness”?
In my recent research publication, my co-authors and I look at the “stickiness” in commercial loan rates. That is, why do they not adjust as much as they should based on the public information on the firm.
Our research finds that the stickiness can be partly attributed to time-varying private information about the borrowing firm. It also investigates whether the stickiness we observe is due to mispricing, because if so, it may come at a great cost to companies and households because it can increase the prices of products. The effects of this phenomenon raise important welfare questions as it may lead to resources in the economy to be misused. We find that stickiness in loan rates does not necessarily indicate mispricing.
If you want to value assets accurately, you must be conscious that could be more than meets the eye. When you look at a company’s stock, or any asset, it is important to understand that we might not have critical information, and people should know this before investing.
My research can help us better appreciate the perceived pricing and uncertainties surrounding an asset. I invite those interested in this phenomenon and our findings to delve deeper into my research.
How does your research impact your teaching?
My research adds depth to class discussions about market efficiency. Beyond questions of the impact of public and private information on asset prices, I also research whether markets are efficient overall or not. I add my own findings to classroom discussions of topics such as the 2008 Housing Crisis, where people got too excited about mortgage-backed securities and the market eventually corrected itself.
I also stress in my courses that information is key in finance, especially with the advancement of technology. To make financial decisions like asset pricing, people are trying to process as much information as possible.
How do you see this research impacting the world?
Maybe market inefficiency might not directly appear to be affecting your life, but the effects are there. If a mortgage loan pricing rate is higher than it should be, then there might be inefficiency and the borrower will have to spend more time paying off that loan. This would cause stress and time for people as they pay for that inefficiency, impacting them financially and emotionally. That takes a toll.
When the market is working efficiently, this makes the lives of the people involved in the market easier. My research seeks to help provide data and reasoning that can help regulate the market and hopefully help improve people’s lives.
