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Asymmetric Information in Financial Markets: Anything Goes


Bradyn M. Breon-Drish


Stanford Graduate School of Business

December 12, 2010


Abstract:     
I study a standard Grossman and Stiglitz (1980) noisy rational expectations economy, but relax the usual assumption of the normality of fundamental and supply. My solution approach dispenses with the typical "conjecture and verify" method and enables me to analytically solve an entire class of previously intractable nonlinear models that nests the standard model. I show how: (1) price jumps and crashes may arise endogenously, purely due to learning effects, (2) observation of the net trading volume of informed and noise traders may be valuable for investors in the economy as it can provide a refinement of the information conveyed by price, (3) the value of acquiring information may be non-monotonic in the number of informed traders, leading to multiple equilibria in the information market, and (4) the relation between disagreement and future returns is ambiguous. In short, many of the results from noisy rational expectations models are not robust. Finally, I introduce monotone likelihood ratio conditions that determine the signs of the various comparative statics, which represents the first demonstration of the importance of the MLRP for comparative statics in this literature.

Keywords: Asymmetric Information, Noisy Rational Expectations, Strategic Complementarity, Crashes

JEL Classification: D82, G14

working papers series


Not Available For Download

Date posted: November 27, 2010 ; Last revised: March 14, 2014

Suggested Citation

Breon-Drish, Bradyn M., Asymmetric Information in Financial Markets: Anything Goes (December 12, 2010). Available at SSRN: http://ssrn.com/abstract=1711022 or http://dx.doi.org/10.2139/ssrn.1711022

Contact Information

Bradyn M. Breon-Drish (Contact Author)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-1901 (Phone)

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