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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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  1. Kraus, Alan & Smith, Maxwell, 1989. " Market Created Risk," Journal of Finance, American Finance Association, vol. 44(3), pages 557-69, July. [Downloadable!] (restricted)
  2. 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)
  3. 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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  4. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-65, June. [Downloadable!] (restricted)
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  5. 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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  6. 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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  7. 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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  8. Mirman, Leonard J. & Reisman, Haim, 1988. "Price fluctuations when only prices reveal information," Economics Letters, Elsevier, vol. 27(4), pages 305-310. [Downloadable!] (restricted)
  9. 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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  10. 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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  11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  12. repec:fth:coluec:601 is not listed on IDEAS
  13. 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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  14. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 317-55, July. [Downloadable!] (restricted)
  15. 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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  16. 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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  17. Barsky, Robert B. & Long, J. Bradford De, 1990. "Bull and Bear Markets in the Twentieth Century," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 265-281, June. [Downloadable!]
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