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Asymmetric Information and Survival in Financial Markets

  • Sciubba, E.

In the evolutionary setting for a financial market developed by Blume and Easley (1992) the author considers an infinitely repeated version of a model B la Grossman and Stiglitz (1980) with asymmetrically informed traders. Informed traders observe the realisation of a payoff relevant signal before making their portfolio decisions. Uninformed traders do not have direct access to this kind of information, but can partially infer it from market prices. As a counterpart to their privileged information, informed traders pay a per period cost. As a result, information acquisition triggers a trade-off in this setting. It is proved that, so long as information is costly, a strictly positive measure of uninformed traders will survive. This result contributes to the literature on noise trading. It suggests that Friedman's (1953) argument is too simplistic. Traders whose beliefs are wrong' according to the best available information, in fact, are not wiped out by market forces and do affect asset prices in the long run.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/wp9908.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9908.

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Date of creation: Jun 1999
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Handle: RePEc:cam:camdae:9908
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  2. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  3. Jordan, J. S., 1982. "The generic existence of rational expectations equilibrium in the higher dimensional case," Journal of Economic Theory, Elsevier, vol. 26(2), pages 224-243, April.
  4. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  5. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-45, December.
  6. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991. "The Survival of Noise Traders in Financial Markets," Scholarly Articles 3725470, Harvard University Department of Economics.
  7. Green, Jerry, 1977. "The Non-existence of Informational Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 451-63, October.
  8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  9. James Dow & Rohit Rahi, 1996. "Informed Trading, Investment and Welfare," Archive Working Papers 029, Birkbeck, Department of Economics, Mathematics & Statistics.
  10. Grossman, Sanford J, 1977. "The Existence of Futures Markets, Noisy Rational Expectations and Informational Externalities," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 431-49, October.
  11. Sciubba, E., 1999. "The Evolution of Portfolio Rules and the Capital Asset Pricing Model," Cambridge Working Papers in Economics 9909, Faculty of Economics, University of Cambridge.
  12. Jonathan B. Berk, 1997. "The acquisition of information in a dynamic market (*)," Economic Theory, Springer, vol. 9(3), pages 441-451.
  13. Laffont, Jean-Jacques M, 1985. "On the Welfare Analysis of Rational Expectations Equilibria with Asymmetric Information," Econometrica, Econometric Society, vol. 53(1), pages 1-29, January.
  14. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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  18. Conlisk, John, 1980. "Costly optimizers versus cheap imitators," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 275-293, September.
  19. repec:cup:cbooks:9780521378574 is not listed on IDEAS
  20. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November.
  21. Jordan, James S. & Radner, Roy, 1982. "Rational expectations in microeconomic models: An overview," Journal of Economic Theory, Elsevier, vol. 26(2), pages 201-223, April.
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  26. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
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