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Rational Asset-Price Movements without News

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Author Info
Romer, David

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Abstract

This paper argues that an important part of movements in asset prices may be caused by neither external news nor irrationality but by the revelation of information by the trading process itself. Two models are developed that illustrate this general idea. One model is based on investor uncertainty about the quality of other investors' information; the other is based on dispersion of information and small costs to trading. The analysis is used to suggest a possible rational explanation of the October 1987 crash. Copyright 1993 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 83 (1993)
Issue (Month): 5 (December)
Pages: 1112-30
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Handle: RePEc:aea:aecrev:v:83:y:1993:i:5:p:1112-30

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes, and Wisdom after the Fact," Harvard Institute of Economic Research Working Papers 1594, Harvard - Institute of Economic Research.
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  2. Kraus, Alan & Smith, Maxwell, 1989. " Market Created Risk," Journal of Finance, American Finance Association, vol. 44(3), pages 557-69, July. [Downloadable!] (restricted)
  3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  4. repec:fth:coluec:601 is not listed on IDEAS
  5. Grossman, Sanford J, 1977. "The Existence of Futures Markets, Noisy Rational Expectations and Informational Externalities," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 431-49, October. [Downloadable!] (restricted)
  6. Jeremy Bulow & Paul Klemperer, 1991. "Rational Frenzies and Crashes," NBER Technical Working Papers 0112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 41-66. [Downloadable!] (restricted)
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  8. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 5-33. [Downloadable!] (restricted)
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  9. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 317-55, July. [Downloadable!] (restricted)
  10. Engle, Robert F & Ito, Takatoshi & Lin, Wen-Ling, 1990. "Meteor Showers or Heat Waves? Heteroskedastic Intra-daily Volatility in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 58(3), pages 525-42, May. [Downloadable!] (restricted)
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  11. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December. [Downloadable!] (restricted)
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  12. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1989. "What Moves Stock Prices?," NBER Working Papers 2538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Mirman, Leonard J. & Reisman, Haim, 1988. "Price fluctuations when only prices reveal information," Economics Letters, Elsevier, vol. 27(4), pages 305-310. [Downloadable!] (restricted)
  14. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," Journal of Business, University of Chicago Press, vol. 61(3), pages 275-98, July. [Downloadable!] (restricted)
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  15. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
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  16. Caplin, A. & Leahy, J., 1991. "Asymetric Information, Adjustment Costs and Market Dynamics," Harvard Institute of Economic Research Working Papers 1565, Harvard - Institute of Economic Research.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley. [Downloadable!]
    Other versions:
  2. Takatoshi Ito Richard K. Lyons and Michael T. Melvin., 1997. "Is There Private Information in the FX Market? The Tokyo Experiment," Research Program in Finance Working Papers RPF-270, University of California at Berkeley. [Downloadable!]
    Other versions:
  3. William O. Brown, Jr., . "Inside Information and Public News: R-Squared and Beyond," Claremont Colleges Working Papers 1999-26, Claremont Colleges. [Downloadable!]
  4. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. José M. Marín & Jacques Olivier, 2007. "The dog that did not bark: Insider trading and crashes," Working Papers 2007-20, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales. [Downloadable!]
    Other versions:
  6. Matthew Spiegel, 1996. "Stock Price Volatility in a Multiple Security Overlapping Generations Model," Finance 9608002, EconWPA. [Downloadable!]
  7. Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Frankel, David M., 2007. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers 12817, Iowa State University, Department of Economics. [Downloadable!]
  9. Noeth, Markus & Camerer, Colin F. & Plott, Charles R. & Webber, Martin, 1999. "Information Aggregation in Experimental Asset Markets: Traps and Misaligned Beliefs," Working Papers 1060, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  10. Tro Kortian, 1995. "Modern Approaches to Asset Price Formation: A Survey of Recent Theoretical Literature," RBA Research Discussion Papers rdp9501, Reserve Bank of Australia. [Downloadable!]
  11. Kristen L. Willard & Timothy W. Guinnane & Harvey S. Rosen, 1996. "Turning Points in the Civil War: Views from the Greenback Market," NBER Working Papers 5381, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Giampiero M. Gallo & Yongmiao Hong & Tae-Why Lee, 2001. "Modelling the Impact of Overnight Surprises on Intra-daily Stock Returns," Econometrics Working Papers Archive wp2001_03, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti". [Downloadable!]
  13. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr. [Downloadable!]
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  14. Giampiero M. Gallo, 2001. "Modelling the Impact of Overnight Surprises on Intra-daily Volatility," Econometrics Working Papers Archive wp2001_02, Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti". [Downloadable!]
    Other versions:
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