Information costs in financial markets: evidence from the Tunisian stock market

Abstract

Purpose

The purpose of this paper is to discuss a widespread idea in the financial literature: information in financial markets is free. Indeed, whenever an investor wants to intervene to purchase and/or to sell, he/she faces the need to access the information, which he/she judges to ensure an optimal decision.

Design/methodology/approach

The paper uses the entropy statistics in order to estimate the information cost of the assets of the Tunisian stock market over the period extending from 2002 to 2005.

Findings

The obtained results show that the information costs follow a Brownian motion. This finding lends empirical support to the theoretical position that has always been adopted in the relevant literature: in finance, as in economy, the majority of the series follow a Brownian motion.

Practical implications

The proposed methodology offers investors the opportunity to estimate the information cost by taking into account the quotation probability, a simple approach that can be used not only by fund managers, but also by financial market investors.

Originality/value

The paper uses entropy as a relatively new tool applied in financial theory. It offers a new understanding of information cost. The paper will be of interest for financial market investors and academics.

Citation

Safer Chakroun, I. and Hamdouni, A. (2010), "Information costs in financial markets: evidence from the Tunisian stock market", Journal of Risk Finance, Vol. 11 No. 4, pp. 401-409. https://doi.org/10.1108/15265941011071520