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Testing Financial Market Equilibrium under Asymmetric Information

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  • Lang, Larry H P
  • Litzenberger, Robert H
  • Madrigal, Vicente

Abstract

The authors devise tests that distinguish between competitive (Walrasian), fully revealing rational expectations and noisy rational expectations equilibria based on their predictions concerning trading volume around public information signals. Empirical results strongly support the noisy rational expectations hypothesis. This indicates that a significant amount of noise exists (so that private information has value), but not enough to obfuscate entirely the information content of price. The authors' analysis also indicates that the dispersion of private information across traders has an impact on trading volume, but not on price. Copyright 1992 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 100 (1992)
Issue (Month): 2 (April)
Pages: 317-48

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Handle: RePEc:ucp:jpolec:v:100:y:1992:i:2:p:317-48

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Huang, Roger D. & Masulis, Ronald W., 2003. "Trading activity and stock price volatility: evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 249-269, May.
  2. Frankel, Jeffrey A & Schmukler, Sergio L, 2000. "Country Funds and Asymmetric Information," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 177-95, July.
  3. Zhou, Chunsheng, 1998. "Dynamic portfolio choice and asset pricing with differential information," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 1027-1051, May.
  4. Cunado Eizaguirre, Juncal & Biscarri, Javier Gomez & Hidalgo, Fernando Perez de Gracia, 2004. "Structural changes in volatility and stock market development: Evidence for Spain," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1745-1773, July.
  5. Lee, Yi-Tsung & Lin, Ji-Chai & Liu, Yu-Jane, 1999. "Trading patterns of big versus small players in an emerging market: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 701-725, May.
  6. Carl Plat, 2005. "A Double Auction Market with Signals of Varying Precision," Experimental 0508004, EconWPA.
  7. Jong-Seo Choi & Chongwoo Choe, 1996. "Explanatory Factors for Trading Volume Responses to Annual Earnings Announcements: Evidence from the Korean Stock Market," Working Papers 1996.07, School of Economics, La Trobe University.
  8. Numan Ülkü, 2008. "Do Big Investors’ Trades Have Predictive Power? A Note on Istanbul Stock Market," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 2(1), pages 85-108.
  9. Mougoué, Mbodja & Aggarwal, Raj, 2011. "Trading volume and exchange rate volatility: Evidence for the sequential arrival of information hypothesis," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2690-2703, October.
  10. Carrera, Jose M., 1999. "Speculative attacks to currency target zones: A market microstructure approach," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 555-582, December.

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