Public Information and Heuristic Trade
Paul E. Fischer
University of Pennsylvania - The Wharton School
Robert E. Verrecchia
University of Pennsylvania - Accounting Department
September 1, 1998
We characterize the steady-state equilibrium in which informed traders who exhibit heuristic (i.e., representativeness, as opposed to Bayesian) and Bayesian behaviors achieve the same expected utility. Then, we show how the endogenous, steady-state proportion of heuristic traders is affected by the quality of public information and other exogenous features of our model. Finally, we discuss how the presence of heuristic traders potentially alters the link between improved public disclosure and: market liquidity, the variance in the change in price, and market efficiency.
Number of Pages in PDF File: 48
JEL Classification: M41, G14, G19working papers series
Date posted: September 13, 1998
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