IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Dynamic market participation and endogenous information aggregation

Listed author(s):
  • Edison Yu

This paper studies information aggregation in financial markets with recurrent investor exit and entry. I consider a dynamic general equilibrium model of asset trading with private information and collateral constraints. Investors differ in their aversion to Knightian uncertainty: When uncertainty is high, some investors exit the market. Since exiting investors' information is not fully revealed by prices, conditional return volatility and risk premia both increase. I use data on institutional investors' holdings of individual stocks to show that investor exits indeed move negatively with price in-formativeness. The model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty-averse investors. The model thus predicts less informative prices toward the end of a long boom, as seen in the data. Moreover, economies with looser collateral constraints should see more volatility due to exit and partial revelation. Higher capital requirements can improve welfare by inducing more information revelation by prices.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-42.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-42.

as
in new window

Length:
Date of creation: 2013
Handle: RePEc:fip:fedpwp:13-42
Contact details of provider: Postal:
10 Independence Mall, Philadelphia, PA 19106-1574

Web page: http://www.philadelphiafed.org/

More information through EDIRC

Order Information: Web: http://www.phil.frb.org/econ/wps/index.html Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
  2. Tallon, Jean-Marc, 1998. "Asymmetric Information, Nonadditive Expected Utility, and the Information Revealed by Prices: An Example," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 329-342, May.
  3. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
  4. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, 02.
  5. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
  6. YiLi Chien & Harold Cole & Hanno Lustig, 2012. "Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?," American Economic Review, American Economic Association, vol. 102(6), pages 2859-2896, October.
  7. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
  8. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
  9. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 229-242, October.
  10. Yexiao Xu & Burton G. Malkiel, 2003. "Investigating the Behavior of Idiosyncratic Volatility," The Journal of Business, University of Chicago Press, vol. 76(4), pages 613-644, October.
  11. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, vol. 92(1), pages 128-151, April.
  12. Judson A. Caskey, 2009. "Information in Equity Markets with Ambiguity-Averse Investors," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3595-3627, September.
  13. Ganguli, Jayant & Condie, Scott, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 5631, University of Essex, Department of Economics.
  14. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
  15. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
  16. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
  17. Antonio Mele & Francesco Sangiorgi, 2009. "Ambiguity, Information Acquisition and Price Swings in Asset Markets," FMG Discussion Papers dp633, Financial Markets Group.
  18. Duffie, Darrell & Sun, Tong-sheng, 1990. "Transactions costs and portfolio choice in a discrete-continuous-time setting," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 35-51, February.
  19. He, Hua & Modest, David M, 1995. "Market Frictions and Consumption-Based Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 94-117, February.
  20. John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
  21. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
  22. Andrew J. Morton & Stanley R. Pliska, 1995. "Optimal Portfolio Management With Fixed Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 337-356.
  23. Harris, Thomas R. & Shonkwiler, John Scott & Lin, Yuanfang, 2001. "Application Of Discrete Normal Distribution For Dynamic Rural Retail Sector Analysis: Preliminary Results," 2001 Annual meeting, August 5-8, Chicago, IL 20456, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  24. Alberto Naudon & Matías Tapia & Felipe Zurita, 2004. "Ignorance, Fixed Costs, and the Stock-Market Participation Puzzle," Documentos de Trabajo 262, Instituto de Economia. Pontificia Universidad Católica de Chile..
  25. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
  26. David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2014. "Estimating ambiguity aversion in a portfolio choice experiment," Quantitative Economics, Econometric Society, vol. 5, pages 195-223, 07.
  27. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  28. Han Ozsoylev & Jan Werner, 2011. "Liquidity and asset prices in rational expectations equilibrium with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 469-491, October.
  29. Richard W. Sias & Laura T. Starks, 2006. "Changes in Institutional Ownership and Stock Returns: Assessment and Methodology," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2869-2910, November.
  30. Patrick J. Dennis & Deon Strickland, 2002. "Who Blinks in Volatile Markets, Individuals or Institutions?," Journal of Finance, American Finance Association, vol. 57(5), pages 1923-1949, October.
  31. Allen, Beth E, 1981. "Generic Existence of Completely Revealing Equilibria for Economies with Uncertainty when Prices Convey Information," Econometrica, Econometric Society, vol. 49(5), pages 1173-1199, September.
  32. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
  33. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
  34. Nuno Fernandes & Miguel A. Ferreira, 2009. "Insider Trading Laws and Stock Price Informativeness," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1845-1887, May.
  35. 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.
  36. Rubin, Amir & Smith, Daniel R., 2009. "Institutional ownership, volatility and dividends," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 627-639, April.
  37. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  38. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-1467, November.
  39. Cai, Fang & Zheng, Lu, 2004. "Institutional trading and stock returns," Finance Research Letters, Elsevier, vol. 1(3), pages 178-189, September.
  40. Ekkehart Boehmer & Juan (Julie) Wu, 2013. "Short Selling and the Price Discovery Process," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 287-322.
  41. repec:esx:essedp:720 is not listed on IDEAS
  42. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-657, May.
  43. Gerard Gennotte & Alan Jung, 1994. "Investment Strategies under Transaction Costs: The Finite Horizon Case," Management Science, INFORMS, vol. 40(3), pages 385-404, March.
  44. Beth Allen & James S. Jordan, 1998. "The existence of rational expectations equilibrium: a retrospective," Staff Report 252, Federal Reserve Bank of Minneapolis.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:13-42. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.