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Volatility, Information, and Noise Trading


  • 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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Suggested Citation

  • Jean-Pierre DANTHINE & Serge MORESI, 1990. "Volatility, Information, and Noise Trading," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9015, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:9015

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    Cited by:

    1. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Luis Angel Medran & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, European Finance Association, vol. 8(2), pages 199-277.
    3. Cespa, Giovanni, 2002. "Short-term investment and equilibrium multiplicity," European Economic Review, Elsevier, vol. 46(9), pages 1645-1670, October.
    4. Cerin, Pontus, 2006. "Bringing economic opportunity into line with environmental influence: A discussion on the Coase theorem and the Porter and van der Linde hypothesis," Ecological Economics, Elsevier, vol. 56(2), pages 209-225, February.
    5. Manzano, Carolina & Vives, Xavier, 2009. "Information Dispersion and Equilibrium Multiplicity," Working Papers 2072/43862, Universitat Rovira i Virgili, Department of Economics.
    6. Krebs, Tom, 2005. "Fundamentals, information, and international capital flows: A welfare analysis," European Economic Review, Elsevier, vol. 49(3), pages 579-598, April.
    7. Frechette, Darren L. & Delavan, Willard, 1998. "El Nino And Coffee Price Volatility In 1997," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20908, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Manzano, Carolina & Vives, Xavier, 2011. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 346-369.
    9. Orosel, Gerhard O., 1996. "Informational efficiency and welfare in the stock market," European Economic Review, Elsevier, vol. 40(7), pages 1379-1411, August.
    10. repec:eee:ecmode:v:66:y:2017:i:c:p:121-131 is not listed on IDEAS
    11. Rui Fan & Oleksandr Talavera & Vu Tran, 2018. "Social media bots and stock markets," Working Papers 2018-30, Swansea University, School of Management.
    12. Calcagno, Riccardo & Heider, Florian, 2007. "Market based compensation, price informativeness and short-term trading," Working Paper Series 735, European Central Bank.
    13. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long-Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    14. H. F. Baklaci & O. Olgun & E. Can, 2011. "Noise traders: a new approach to understand the phantom of stock markets," Applied Economics Letters, Taylor & Francis Journals, vol. 18(11), pages 1035-1041.
    15. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary University of London, School of Economics and Finance.
    16. Jin, Xi & Shen, Dehua & Zhang, Wei, 2016. "Has microblogging changed stock market behavior? Evidence from China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 452(C), pages 151-156.
    17. repec:bla:eufman:v:20:y:2014:i:5:p:926-957 is not listed on IDEAS


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