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Beauty Contests and Asset Prices under Asymmetric Information

Author

Listed:
  • Ishikawa, Ryuichiro
  • Kudoh, Noritaka

Abstract

In this paper, we study a dynamic Gaussian financial market model in which the traders form higher-order expectations about the fundamental value of a single risky asset. Rational uninformed traders are introduced into an otherwise standard differential information economy to investigate the impact of asymmetric information. In a two-period economy, there is a unique linear equilibrium; beauty contests under asymmetric information do not introduce excess volatility driven by self-fulfilling multiple equilibria. Under certain conditions, there is a nonmonotonic relationship between price volatility and the proportion of uninformed traders.

Suggested Citation

  • Ishikawa, Ryuichiro & Kudoh, Noritaka, 2010. "Beauty Contests and Asset Prices under Asymmetric Information," Discussion paper series. A 218, Graduate School of Economics and Business Administration, Hokkaido University.
  • Handle: RePEc:hok:dpaper:218
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    File URL: http://hdl.handle.net/2115/42576
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    File URL: https://eprints.lib.hokudai.ac.jp/dspace/bitstream/2115/42576/1/DPA218.pdf
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    More about this item

    Keywords

    higher-order expectations; asset prices; asymmetric information; D82; D84; G12; G14;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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