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The More We Know about the Fundamental, the Less We Agree on the Price

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  • Péter Kondor

Abstract

I allow trading horizon heterogeneity across groups in a standard differential information model of a financial market. This approach can explain the well-established phenomenon that, after a public announcement, trading volume increases, more private information is incorporated into prices and volatility increases. In such environments, public information has the important secondary role of helping agents learn about the information of other agents. Therefore, whenever the correlation between the private information of different groups is sufficiently low, a public announcement increases disagreement among short-horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested. Copyright , Oxford University Press.

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  • Péter Kondor, 2012. "The More We Know about the Fundamental, the Less We Agree on the Price," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1175-1207.
  • Handle: RePEc:oup:restud:v:79:y:2012:i:3:p:1175-1207
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    15. Han, Bing & Tang, Ya & Yang, Liyan, 2016. "Public information and uninformed trading: Implications for market liquidity and price efficiency," Journal of Economic Theory, Elsevier, vol. 163(C), pages 604-643.
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    18. Liyan Yang & Itay Goldstein, 2012. "Information Diversity and Market Efficiency Spirals," 2012 Meeting Papers 349, Society for Economic Dynamics.
    19. Elías Albagli, 2013. "Investment Horizons and Asset Prices under Asymmetric Information," Working Papers Central Bank of Chile 709, Central Bank of Chile.

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