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Rational expectations equilibrium with uncertain proportion of informed traders

  • Gao, Feng
  • Song, Fengming
  • Wang, Jun
Registered author(s):

    This paper introduces uncertainty regarding the proportion of informed traders in a rational expectation equilibrium model with asymmetric information. The proportion uncertainty dramatically changes the properties of the resulting equilibrium. First, it may generate multiple nonlinear rational expectations equilibria, which can help explain the excessive volatility of stock prices. Second, the expected price informativeness is a non-monotonic function of the proportion of informed traders, which suggests that the traders will have more incentive to become informed as the proportion of informed traders gets larger.

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    File URL: http://www.sciencedirect.com/science/article/pii/S138641811200016X
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    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 16 (2013)
    Issue (Month): 3 ()
    Pages: 387-413

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    Handle: RePEc:eee:finmar:v:16:y:2013:i:3:p:387-413
    Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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