Securities Trading Under Asymmetric Information and Trading Constraints

31 Pages Posted: 27 Feb 2005

See all articles by Kathy Yuan

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

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

Yuan, Kathy Zhichao, Securities Trading Under Asymmetric Information and Trading Constraints (September 2004). Available at SSRN: https://ssrn.com/abstract=672862 or http://dx.doi.org/10.2139/ssrn.672862

Kathy Zhichao Yuan (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

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