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Beauty Contests and Asset Prices under Asymmetric Information

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  • Ishikawa, Ryuichiro
  • Kudoh, Noritaka

Abstract

In 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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File URL: http://hdl.handle.net/2115/42576
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File URL: http://eprints.lib.hokudai.ac.jp/dspace/bitstream/2115/42576/1/DPA218.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics and Business Administration, Hokkaido University in its series Discussion paper series. A with number 218.

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Length: 30 pages
Date of creation: 24 Jan 2010
Date of revision:
Handle: RePEc:hok:dpaper:218

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Keywords: higher-order expectations; asset prices; asymmetric information; D82; D84; G12; G14;

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