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Trading, Communication and the Response of Asset Prices to News

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Author Info

  • Dow, James
  • Gorton, Gary

Abstract

The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn over time from market prices. The model introduces an information structure that is intended to capture the notion that information is difficult to interpret. Strategic interaction and the complexity of the information result in a protracted price response. Equilibrium price paths of the model may display reversals in which the two traders rationally revise their beliefs, first in one direction and then in the opposite direction, even though no new information has entered the system. Copyright 1993 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 103 (1993)
Issue (Month): 418 (May)
Pages: 639-46

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Handle: RePEc:ecj:econjl:v:103:y:1993:i:418:p:639-46

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Cited by:
  1. Chan, Kalok & Chockalingam, Mark & Lai, Kent W. L., 2000. "Overnight information and intraday trading behavior: evidence from NYSE cross-listed stocks and their local market information," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 495-509, December.
  2. Carmi, Nava & Ronen, Boaz, 1996. "An empirical application of the information-structures model: The postal authority case," European Journal of Operational Research, Elsevier, vol. 92(3), pages 615-627, August.
  3. C.L. Osler & John A. Carlson, 1996. "Rational speculators and exchange rate volatility," Staff Reports 13, Federal Reserve Bank of New York.
  4. Tilman Borgers & Angel Hernanco-Veciana & Daniel Krohmer, 2010. "When are Signals Complements or Substitutes," Discussion Papers 1488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Osler, C. L., 1998. "Short-term speculators and the puzzling behaviour of exchange rates," Journal of International Economics, Elsevier, vol. 45(1), pages 37-57, June.
  6. Maloney, Michael T. & Mulherin, J. Harold, 2003. "The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 453-479, September.
  7. 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, Informatica, Applicazioni "G. Parenti".

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