Securities Trading Under Asymmetric Information and Trading Constraints
31 Pages Posted: 27 Feb 2005
Date Written: September 2004
Abstract
This paper develops a non-linear rational expectations equilibrium (REE) solution for a class of economies under both asymmetric information and trading constraints. It then analyzes the properties of this equilibrium in a one-risky-asset economy with borrowing and shortsale constraints. The model suggests that 1) price informativeness varies with the price level; and 2) compared with an economy with borrowing constraints and information asymmetry, the asymmetry in large price movements is more pronounced in the presence of both constraints. A dynamic implication of this result is that crashes (large downward price movements) are formed much faster than bubbles (large upward price movements).
Keywords: Trading constraints, information asymmetry, REE, bubbles, crashes, shortsales constraints, borrowing constraints
JEL Classification: D82, D84, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Is Information Risk a Determinant of Asset Returns?
By David Easley, Soeren Hvidkjaer, ...
-
By Tarun Chordia, Avanidhar Subrahmanyam, ...
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi