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Learning Whether Other Traders Are InformedSnehal BanerjeeNorthwestern University - Kellogg School of Management - Department of Finance Brett S. GreenUniversity of California, Berkeley - Haas School of Business February 15, 2013 Abstract: We develop a dynamic model in which investors must learn whether others are informed and, therefore, learn how to use the information in prices. We show that the price is a non-linear function of the underlying signal, and expected returns and volatility are stochastic and persistent, even though shocks to fundamentals and signals are i.i.d. The price reaction to information about dividends is asymmetric: the price reacts more strongly to bad news than it does to good news. The model also generates volatility clustering in which large return realizations, which are associated with dividend surprises, are followed by higher volatility and higher expected returns.
Number of Pages in PDF File: 38 Keywords: Asset Prices, Trade, Learning, Asymmetric Information, Rational Expectations JEL Classification: G12, G14 working papers seriesDate posted: September 2, 2012 ; Last revised: February 20, 2013Suggested CitationContact Information
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