Dynamic Trading and Asset Prices: Keynes Vs. Hayek

49 Pages Posted: 22 Mar 2009

See all articles by Giovanni Cespa

Giovanni Cespa

Bayes Business School; Bayes Business School; Centre for Economic Policy Research (CEPR)

Xavier Vives

University of Navarra - IESE Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 4 versions of this paper

Date Written: March, 18 2009

Abstract

We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model. We look at the bias of prices as estimators of fundamental value in relation to traders' average expectations and note that prices are more (less) biased than average expectations if and only if traders over- (under-) rely on public information with respect to optimal statistical weights. We find that prices are biased in relation to average expectations whenever traders speculate on short-run price movements. In a market with long term traders, over-reliance on public information obtains if noise trade increments are correlated enough and/or there is low enough residual uncertainty in the payoff. This defines a "Keynesian" region; the complementary region is "Hayekian" in that prices are less biased than average expectations in the estimation of fundamental value. The standard case of no residual uncertainty and noise trading following a random walk is on the frontier of the two regions. With short-term traders there typically are two equilibria, with the stable (unstable) one displaying over-(under-) reliance on public information.

Keywords: Price bias, long and short-term trading, multiple equilibria, average expectations,

JEL Classification: G10, G12, G14

Suggested Citation

Cespa, Giovanni and Cespa, Giovanni and Vives, Xavier, Dynamic Trading and Asset Prices: Keynes Vs. Hayek (March, 18 2009). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1363975 or http://dx.doi.org/10.2139/ssrn.1363975

Giovanni Cespa

Bayes Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)2040708704 (Phone)

Bayes Business School ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Xavier Vives (Contact Author)

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
202
Abstract Views
2,799
Rank
82,501
PlumX Metrics