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Net trade and market efficiency in Grossman and Stiglitz (1980)

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  • Ou-Yang, Hui
  • Wu, Weili

Abstract

In this paper, we correct part (b) of Theorem 6 of Grossman and Stiglitz (GS, 1980). We demonstrate that when the private signal tends to be perfect, the market converges to strong-form efficiency, and thus informed and uninformed traders have almost homogeneous beliefs about the stock payoff, but there is still significant net trade, rather than no trade as erroneously shown by GS. We further show that when the stock price becomes more informative, and thus traders' beliefs about the stock payoff become closer, the net trade may increase.

Suggested Citation

  • Ou-Yang, Hui & Wu, Weili, 2017. "Net trade and market efficiency in Grossman and Stiglitz (1980)," Journal of Economic Theory, Elsevier, vol. 167(C), pages 75-85.
    • Handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:75-85
    DOI: 10.1016/j.jet.2016.10.006
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    References listed on IDEAS

    as
    1. Minh Chau & Dimitri Vayanos, 2008. "Strong-Form Efficiency with Monopolistic Insiders," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2275-2306, September.
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    4. Kovalenkov, Alexander & Vives, Xavier, 2014. "Competitive rational expectations equilibria without apology," Journal of Economic Theory, Elsevier, vol. 149(C), pages 211-235.
    5. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    6. Milgrom, Paul R, 1981. "Rational Expectations, Information Acquisition, and Competitive Bidding," Econometrica, Econometric Society, vol. 49(4), pages 921-943, June.
    7. Gul, Ferdinand A. & Kim, Jeong-Bon & Qiu, Annie A., 2010. "Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: Evidence from China," Journal of Financial Economics, Elsevier, vol. 95(3), pages 425-442, March.
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    More about this item

    Keywords

    Net trade; Traders' beliefs; Market efficiency; The Grossman–Stiglitz model;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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