63 Pages Posted: 2 Sep 2012 Last revised: 29 Mar 2017
Date Written: January 1, 2015
We develop a model where some investors are uncertain whether others are trading on informative signals or noise. Uncertainty about others leads to a non-linear price that reacts asymmetrically to news. We incorporate this uncertainty into a dynamic setting where traders gradually learn about others and show that it generates 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.
Keywords: Learning, Asymmetric Information, Rational Expectations, Noise Trading, Sentiment, Difference of opinions, Volatility clustering, Leverage effect
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Banerjee, Snehal and Green, Brett S., Signal or Noise? Uncertainty and Learning about Whether Other Traders are Informed (January 1, 2015). Journal of Financial Economics (JFE), 2015, 117(2): 398-423. Available at SSRN: https://ssrn.com/abstract=2139771 or http://dx.doi.org/10.2139/ssrn.2139771