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Volatility, Information and Noise Trading

Listed author(s):
  • Jean-Pierre Danthine
  • Serge Moresi

We construct a dynamic competitive model with futures markets where price volatility comes from information arrival and noise trading. In this model, we address three issues: What does informational efficiency mean in a multi-period setting? How do information arrival and noise trading interact to generate price volatility? What are the effects of futures trading on volatility and welfare? Without noise trading, we show that a fully revealing equilibrium price is unlikely to exist if information flows are serially correlated. If it exists, futures trading affects the time pattern of volatility, but volatility over time sums up to a constant. Information arrival has ambiguous welfare effects and the desirability of a futures market may be controversial. With noise trading, total volatility over time increases with the noise variance but it is reduced by information arrival. The period volatility may now be reduced by the arrival of information as prices are less responsive to noise trading.

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Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ. in its series CEPR Financial Markets Paper with number 0010.

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Date of creation: Nov 1990
Availability: in print
Handle: RePEc:cpr:ceprfm:0010
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