Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry
AbstractThis paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns-even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend-followers, while better informed agents follow contrarian strategies. Trading volume has a hump-shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium. Copyright 2008 by The American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 63 (2008)
Issue (Month): 1 (02)
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