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Asset Prices in a Time Series Model with Disparately Informed, Competative Traders

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  • Kenneth J. Singleton
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    Abstract

    This paper examines the time series properties of the price of a risky asset implied by a model in which competitive traders are heterogeneously informed about the underlying sources of uncertainty in the economy.Traders do not observe the shocks in the period they occur. However, traders are imperfectly and heterogeneously informed about these shocks for three reasons:(1) the shocks are serially correlated arid hence partially forecast able from their past history, (2) each trader receives private signals about the current values of a subset of the shocks, and (3) the equilibrium price conveys information about the private signals and beliefs of other traders. Since prices convey information in this economy, traders will face an infinite regress problem in expectations associated with their desire to forecast the beliefs of others, the beliefs of others about average beliefs, etc.The equilibrium time series representation for the price of the risky security is deduced in various imperfect information environments. Then the volatility and autocorrelations of prices in this model are compared to the corresponding statistics for a model in which agents are homogeneously informed.

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    File URL: http://www.nber.org/papers/w1897.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1897.

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    Date of creation: Apr 1986
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    Publication status: published as Singleton, Kenneth J. "Asset Prices in a Time Series Model with Disparately Informed, Competitive Traders," New Approaches to Monetary Economics, eds. W. Barnett and K.J. Singleton. Cambridge, MA: Cambridge University Press, 1987.
    Handle: RePEc:nbr:nberwo:1897

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    1. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 546-88, August.
    2. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(3), pages 221-235, September.
    3. Singleton, Kenneth J, 1980. "Expectations Models of the Term Structure and Implied Variance Bounds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1159-76, December.
    4. Jarrow, Robert A, 1980. " Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 35(5), pages 1105-13, December.
    5. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 45(6), pages 1377-85, September.
    6. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1163-81, September.
    7. Eichenbaum, Martin & Hansen, Lars Peter, 1990. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(1), pages 53-69, January.
    8. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    9. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
    10. Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 219-239, November.
    11. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, Elsevier, vol. 35(1), pages 19-25, February.
    12. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, Econometric Society, vol. 53(3), pages 629-57, May.
    13. Cornell, Bradford, 1983. "The Money Supply Announcements Puzzle: Review and Interpretation," American Economic Review, American Economic Association, American Economic Association, vol. 73(4), pages 644-57, September.
    14. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
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