Beauty Contests and Asset Prices under Asymmetric Information
AbstractIn this paper, we study a dynamic Gaussian financial market model in which the traders form higher-order expectations about the fundamental value of a single risky asset. Rational uninformed traders are introduced into an otherwise standard differential information economy to investigate the impact of asymmetric information. In a two-period economy, there is a unique linear equilibrium; beauty contests under asymmetric information do not introduce excess volatility driven by self-fulfilling multiple equilibria. Under certain conditions, there is a nonmonotonic relationship between price volatility and the proportion of uninformed traders.
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Bibliographic InfoPaper provided by Graduate School of Economics and Business Administration, Hokkaido University in its series Discussion paper series. A with number 218.
Length: 30 pages
Date of creation: 24 Jan 2010
Date of revision:
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higher-order expectations; asset prices; asymmetric information; D82; D84; G12; G14;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-13 (All new papers)
- NEP-CTA-2010-02-13 (Contract Theory & Applications)
- NEP-FMK-2010-02-13 (Financial Markets)
- NEP-MST-2010-02-13 (Market Microstructure)
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