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

June 2014


Abstract:     
We develop a model in which some traders are uncertain whether other market participants are trading on informative signals or noise. 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 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: 51

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: June 18, 2014

Suggested Citation

Banerjee, Snehal and Green, Brett S., Signal or Noise? Uncertainty and Learning about Whether Other Traders are Informed (June 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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