How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders
AbstractAccommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher-order expectations. That is, rational investors are forced into a situation where they must forecast the forecasts of other agents. In a dynamic setting, this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity. By using the frequency domain approach of Whiteman (1983) and Kasa (2000), this paper demonstrates how information structures previously believed to preserve asymmetric information in equilibrium, converge to a symmetric information, rational expectations equilibrium. The revealing aspect of the price process lies in the invertibility of the observed state space, which makes it possible for agents to infer the economically fundamental shocks and thus eliminating the need to forecast the forecasts of others.
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Bibliographic InfoPaper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2006-011.
Length: 29 pages
Date of creation: Sep 2006
Date of revision:
Asset Pricing; Asymmetric Information;
Other versions of this item:
- Todd B. Walker, 2005. "How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders," Finance 0509021, EconWPA.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-FIN-2006-09-30 (Finance)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-FOR-2006-09-30 (Forecasting)
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