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Forecasting the forecasts of others: Implications for asset pricing

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  • Makarov, Igor
  • Rytchkov, Oleg
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    Abstract

    We study the properties of rational expectation equilibria (REE) in dynamic asset pricing models with heterogeneously informed agents. We show that under mild conditions the state space of such models in REE can be infinite dimensional. This result indicates that the domain of analytically tractable dynamic models with asymmetric information is severely restricted. We also demonstrate that even though the serial correlation of returns is predominantly determined by the dynamics of stochastic equity supply, under certain circumstances asymmetric information can generate positive autocorrelation of returns.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 147 (2012)
    Issue (Month): 3 ()
    Pages: 941-966

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    Handle: RePEc:eee:jetheo:v:147:y:2012:i:3:p:941-966

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Asset pricing; Asymmetric information; Higher order expectations; Momentum;

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    Cited by:
    1. Rui Albuquerque & Jianjun Miao, . "Advance Information and Asset Prices," Boston University - Department of Economics - Working Papers Series wp2009-017, Boston University - Department of Economics.

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