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Professor Xingtan Zhang
Associate Professor of Finance
Cheung Kong Graduate School of Business

Non-fundamental trading motives drive significant and persistent flows in financial markets. This paper examines how an informed trader exploits information related to these flows. The informed trader faces a time-varying trade-off between immediately exploiting current non-fundamental information and creating additional information in the future. Exploitation stabilizes current prices by partially absorbing contemporaneous flows, while manipulation pushes other traders’ beliefs further away from the truth. When the second motive dominates, the informed trader incurs short-term losses by trading in the same direction as non-fundamental flows today. This exacerbates rather than mitigates mispricing, magnifying return reversals.