Private Beliefs and Information Externalities in the Foreign Exchange Market
AbstractAn information externality exists in the foreign exchange market due to the fact that traders play two partially conflicting roles: (i) each is a speculator and (ii) each is an information clearinghouse in that each intermediates own-customer orders which convey information. Profit maximization induces traders to underweight fundamental information in making their trades, reducing the degree to which prices reveal information at any given time. In the model, agents update diverse beliefs over time, with transactions-mediated tatonnement. The explicit role for transactions provides a framework for interpreting the relationship between the diversity of beliefs, trading volume, and price adjustment.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3889.
Date of creation: Oct 1991
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- Lyons, R.K., 1991. "Private Beliefs and Information Externalities in the Foreign Exchange Market," Papers 91-17, Columbia - Graduate School of Business.
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