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Equilibrium price with institutional investors and with naive traders

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  • Dominique Dupont
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    Abstract

    This paper uses a competitive equilibrium model to study how institutional investors influence the volatility and the informativeness of asset prices. Institutional investors are assumed to be "rational" informed traders, while individual investors are supposed to be "naive" informed traders, insofar as the former use the equilibrium price to extract information while the latter do not. The paper compares the informativeness and the volatility of the equilibrium price in an economy in which the informed traders are naive and in one where they are rational; the paper also investigates how the price characteristics react to changes in the parameters, in particular in the number of informed traders.

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    File URL: http://www.federalreserve.gov/pubs/feds/1998/199823/199823abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/1998/199823/199823pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-23.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedgfe:1998-23

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    Related research

    Keywords: Stock - Prices ; Investments;

    References

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    1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
    2. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    3. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Sias, Richard W, 1997. "Price Pressure and the Role of Institutional Investors in Closed-End Funds," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(2), pages 211-29, Summer.
    5. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
    6. Benjamin M. Friedman, 1996. "Economic Implications of Changing Share Ownership," NBER Working Papers 5141, National Bureau of Economic Research, Inc.
    7. Pagano, Marco, 1986. "Trading Volume and Asset Liquidity," CEPR Discussion Papers 142, C.E.P.R. Discussion Papers.
    8. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
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