Trading, Communication and the Response of Price to New Information

32 Pages Posted: 10 Aug 2010  

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

James Dow

London Business School - Institute of Finance and Accounting

Date Written: April 1991

Abstract

The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn over time from market prices. The model introduces an information structure which is intended to capture the notion that information is difficult to interpret. Strategic interaction and the complexity of the information result in a protracted price response. Indeed, equilibrium price paths of the model may display reversals in which the two traders rationally revise their beliefs, first in one direction, and then in the opposite direction, even though no new information has entered the system. A piece of information which is initially thought to be bad news may be revealed, through trading, to be good news.

Suggested Citation

Gorton, Gary B. and Dow, James, Trading, Communication and the Response of Price to New Information (April 1991). NBER Working Paper No. w3687. Available at SSRN: https://ssrn.com/abstract=1656217

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James Dow

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

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