The pricing effects of ambiguous private information
Ambiguous private information leads to informational inefficiency of market prices in rational expectations equilibrium. This inefficiency implies lower asset prices as uninformed traders require a premium to hold assets. This premium is increasing in the riskiness of the asset and leads to excess volatility, price swings, and abrupt volatility and illiquidity variation across informational efficiency regimes. Public information affects the informational efficiency of price and can also lead to abrupt changes involatility and illiquidity.
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