Abstract

http://ssrn.com/abstract=2139771
 
 

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Signal or Noise? Uncertainty and Learning about Whether Other Traders are Informed


Snehal Banerjee


Kellogg School of Management - Department of Finance

Brett S. Green


University of California, Berkeley - Haas School of Business

April 2014


Abstract:     
We develop a model in which some traders are uncertain whether other market participants are trading on informative signals or noise. The framework nests both rational expectations (RE) and differences of opinions (DO) models. However, it generates predictions that do not obtain in either. Specifically, uncertainty about other investors generates a non-linear price that reacts asymmetrically to news. In fact, the price may even decrease with additional good news. We incorporate this uncertainty into a dynamic setting where traders gradually learn about others, which leads to rich return dynamics: expected returns and volatility are stochastic but predictable, and volatility exhibits clustering.

Number of Pages in PDF File: 42

Keywords: Asset Prices, Learning, Asymmetric Information, Rational Expectations, Noise Trading, Sentiment

JEL Classification: G12, G14

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Date posted: September 2, 2012 ; Last revised: April 10, 2014

Suggested Citation

Banerjee, Snehal and Green, Brett S., Signal or Noise? Uncertainty and Learning about Whether Other Traders are Informed (April 2014). Available at SSRN: http://ssrn.com/abstract=2139771 or http://dx.doi.org/10.2139/ssrn.2139771

Contact Information

Snehal Banerjee (Contact Author)
Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
Brett S. Green
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
5105759980 (Phone)
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