Advanced Search
MyIDEAS: Login

Dynamic Trading and Asset Prices: Keynes vs. Hayek

Contents:

Author Info

  • Giovanni Cespa

    () (Queen Mary University of London, Università di Salerno, CSEF and CEPR)

  • Xavier Vives

    (IESE Business School and UPF)

Abstract

We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model. We look at the bias of prices as estimators of fundamental value in relation to traders' average expectations and note that prices are more (less) biased than average expectations if and only if traders over- (under-) rely on public information with respect to optimal statistical weights. We find that prices are biased in relation to average expectations whenever traders speculate on short-run price move- ments. In a market with long term traders, over-reliance on public information obtains if noise trade increments are correlated enough and/or there is low enough residual uncertainty in the payoff. This defines a “Keynesian” region; the complementary region is “Hayekian” in that prices are less biased than average expectations in the estimation of fundamental value. The standard case of no residual uncertainty and noise trading following a random walk is on the frontier of the two regions. With short-term traders there typically are two equilibria, with the stable (unstable) one displaying over- (under-) reliance on public information.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.csef.it/WP/wp191.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 191.

as in new window
Length:
Date of creation: 01 Jan 2008
Date of revision:
Handle: RePEc:sef:csefwp:191

Contact details of provider:
Postal: I-80126 Napoli
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Email:
Web page: http://www.csef.it/
More information through EDIRC

Related research

Keywords: Price bias; long and short-term trading; multiple equilibria; average expectations; higher order beliefs; over-reliance on public information.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Philippe BACCHETTA & Eric VAN WINCOOP, 2004. "Higher Order Expectations in Asset Pricing," FAME Research Paper Series rp110, International Center for Financial Asset Management and Engineering.
  2. Dimitri Vayanos & Paul Woolley, 2011. "An institutional Theory of Momentum and Reversal," FMG Discussion Papers dp666, Financial Markets Group.
  3. Cespa, Giovanni, 2002. "Short-term investment and equilibrium multiplicity," European Economic Review, Elsevier, vol. 46(9), pages 1645-1670, October.
  4. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December.
  5. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, 03.
  6. Giovanni Cespa & Thierry Foucault, 2008. "Insiders-Outsiders, Transparency and the Value of the Ticker," Working Papers 628, Queen Mary, University of London, School of Economics and Finance.
  7. Medrano, Luis Angel & Vives, Xavier, 2002. "Regulating Insider Trading when Investment Matters," CEPR Discussion Papers 3292, C.E.P.R. Discussion Papers.
  8. Péter Kondor, 2005. "The more we know, the less we agree: public announcements and higher-order expectations," FMG Discussion Papers dp532, Financial Markets Group.
  9. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-72, August.
  10. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2001. "Dynamic Volume-Return Relation of Individual Stocks," NBER Working Papers 8312, National Bureau of Economic Research, Inc.
  11. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-72.
  12. Bhattacharya, U. & Spiegel, M., 1989. "Insiders, Outsiders And Market Breakdowns," Papers fb-_89-20, Columbia - Graduate School of Business.
  13. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  14. Marco Ottaviani & Peter Norman Sørensen, 2009. "Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets," Discussion Papers 09-14, University of Copenhagen. Department of Economics.
  15. Manzano, Carolina & Vives, Xavier, 2010. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Working Papers 2072/151544, Universitat Rovira i Virgili, Department of Economics.
  16. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  17. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  18. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141.
  19. Biais, Bruno & Bossaerts, Peter, 1998. "Asset Prices and Trading Volume in a Beauty Contest," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 307-40, April.
  20. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
  21. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  22. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  23. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(2), pages 171-207, Spring.
  24. Cho, Jin-Wan & Krishnan, Murugappa, 2000. "Prices as Aggregators of Private Information: Evidence from S&P 500 Futures Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 111-126, March.
  25. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
  26. Péter Kondor, 2005. "Rational Trader Risk," FMG Discussion Papers dp533, Financial Markets Group.
  27. Vives, Xavier, 1997. "Learning from Others: A Welfare Analysis," Games and Economic Behavior, Elsevier, vol. 20(2), pages 177-200, August.
  28. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  29. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
  2. Kristoffer Nimark, 2009. "Speculative dynamics in the term structure of interest rates," Economics Working Papers 1194, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2012.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:191

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.