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The Pricing Effects of Ambiguous Private Information

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  • Scott Condie
  • Jayant Ganguli

Abstract

Ambiguous private information leads to informational ine fficiency of market prices in rational expectations equilibrium. This ine fficiency implies lower asset prices as uninformed traders require a premium to hold assets. This premium is increasing in the riskiness of the asset and leads to excess volatility, price swings, and abrupt volatility and illiquidity variation across informational ine fficiency regimes. Public information affects the informational ine fficiency of price and can also lead to abrupt changes in volatility and illiquidity.

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Bibliographic Info

Paper provided by Institute for New Economic Thinking (INET) in its series INET Research Notes with number 16.

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Date of creation: 26 Oct 2012
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Handle: RePEc:thk:rnotes:16

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Cited by:
  1. Edison G. Yu, 2013. "Dynamic market participation and endogenous information aggregation," Working Papers 13-42, Federal Reserve Bank of Philadelphia.
  2. Pasquariello, Paolo, 2014. "Prospect Theory and market quality," Journal of Economic Theory, Elsevier, vol. 149(C), pages 276-310.
  3. Mandler, Michael, 2013. "Endogenous indeterminacy and volatility of asset prices under ambiguity," Theoretical Economics, Econometric Society, vol. 8(3), September.
  4. Jayant Ganguli & Scott Condie & Philipp Karl Illeditsch, 2012. "Information Inertia," Economics Discussion Papers 719, University of Essex, Department of Economics.

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