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Conformism, Public News and Market Efficiency

  • Gabriel Desgranges

    ()

    (THEMA, University of Cergy-Pontoise)

  • Céline Rochon

    ()

    (Saïd Business School, University of Oxford)

We study the implications of conformism among analysts in a CARA Gaussian model of the market for a risky asset, where a trader's in- formation is a message sent by an analyst. Conformism increases the weight of the public information in the messages, decreasing their in- formativeness. More precise public information does not always result in more precise messages. A larger precision of the analysts informa- tion does not always make the market more liquid and the price more informative. Conformism creates an overreaction of the price to pub- lic information. Using the price as a public signal does not alter the results.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-24.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-24
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