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

January 2015

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We develop a model where some investors are uncertain whether others are trading on informative signals or noise. Uncertainty about others leads to a non-linear price that reacts asymmetrically to news. We incorporate this uncertainty into a dynamic setting where traders gradually learn about others and show that it generates empirically relevant return dynamics: expected returns are stochastic but predictable, and volatility exhibits clustering and the “leverage” effect. The model nests both the rational expectations (RE) and differences of opinions (DO) approaches and highlights a link between disagreement about fundamentals and uncertainty about other traders.

Number of Pages in PDF File: 63

Keywords: Learning, Asymmetric Information, Rational Expectations, Noise Trading, Sentiment, Difference of opinions, Volatility clustering, Leverage effect

JEL Classification: G12, G14


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Date posted: September 2, 2012 ; Last revised: March 13, 2015

Suggested Citation

Banerjee, Snehal and Green, Brett S., Signal or Noise? Uncertainty and Learning about Whether Other Traders are Informed (January 2015). Journal of Financial Economics (JFE), Forthcoming. 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, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
5105759980 (Phone)
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