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Inefficient Information Aggregation as a

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  • Friedman, Daniel
  • Aoki, Masanao

Abstract

This paper presents a new theory of bubbles, or discrepancies between the market clearing price and the fundamental value of an asset. In the authors' setting, Bayesian traders, oriented towards long-term gains, receive private information ("news") and also make inferences from noisy price signals. Price exhibits higher variance than fundamental value (the latter defined.as fully-aggregated expected value) especially when news is informative but infrequent. The corresponding bubbles are self-limiting but may exhibit momentum and over-shooting. A parametric example, involving the exponential/gamma conjugate families, is provided. Copyright 1992 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Suggested Citation

  • Friedman, Daniel & Aoki, Masanao, 1992. "Inefficient Information Aggregation as a," Bulletin of Economic Research, Wiley Blackwell, vol. 44(4), pages 251-279, October.
    • Handle: RePEc:bla:buecrs:v:44:y:1992:i:4:p:251-79
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    Cited by:

    1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    2. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
    3. Arthur, W.B. & Holland, J.H. & LeBaron, B. & Palmer, R. & Tayler, P., 1996. "Asset Pricing Under Endogenous Expectations in an Artificial Stock Market," Working papers 9625, Wisconsin Madison - Social Systems.
    4. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.

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