Differential information and excessive volatility in financial markets
AbstractIt is analysed whether risk averse agents possessing different information have an incentive to trade in a zero-sum market. The key to generate trading in a zero-sum speculative market is whether expectations are »homogenized» through the trading process. If not, trading will take place and all agents expect to be able to exploit private information not fully revealed by market prices to make a speculative profit. The existence of a rational expectations equilibrium with heterogenous expectations is proven to exist, and shown to imply excessive volatility ofprices and trading volumes.
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Bibliographic InfoArticle provided by Finnish Economic Association in its journal Finnish Economic Papers.
Volume (Year): 5 (1992)
Issue (Month): 1 (Spring)
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- Friedman, Daniel & Aoki, Masanao, 1986. "Asset price bubbles from poorly aggregated information : A parametric example," Economics Letters, Elsevier, vol. 21(1), pages 49-52.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
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J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
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- Black, Jane & Tonks, Ian, 1990. "Asset Price Variability under Asymmetric Information," Economic Journal, Royal Economic Society, vol. 100(400), pages 67-77, Supplemen.
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