Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims

108 Pages Posted: 8 Jun 2014 Last revised: 13 Apr 2020

See all articles by Georgy Chabakauri

Georgy Chabakauri

London School of Economics and Political Science

Kathy Yuan

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

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London

Date Written: April 11, 2020

Abstract

We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow-Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.

Keywords: asymmetric information, rational expectations, learning from prices, contingent claims, derivative securities

JEL Classification: D82, G12, G14

Suggested Citation

Chabakauri, Georgy and Yuan, Kathy Zhichao and Zachariadis, Konstantinos E., Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims (April 11, 2020). Paris December 2015 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=2446873 or http://dx.doi.org/10.2139/ssrn.2446873

Georgy Chabakauri (Contact Author)

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/

Kathy Zhichao Yuan

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

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London ( email )

Graduate Centre
Mile End Campus
London, E1 4NS
United Kingdom
+44 20 7882 8698 (Phone)

HOME PAGE: http://www.konstantinosezachariadis.com

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