Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry

48 Pages Posted: 7 May 2002

See all articles by Masahiro Watanabe

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2007

Abstract

This paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns - even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend-followers, while better informed agents follow contrarian strategies. Trading volume has a hump-shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium.

Keywords: overlapping generations, noisy rational expectations equilibrium, excessive volatility, comovement, trend-following behavior, contrarians

JEL Classification: G12, G14

Suggested Citation

Watanabe, Masahiro, Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry (July 31, 2007). AFA 2003 Washington, DC Meetings; Yale ICF Working Paper No. 02-12. Available at SSRN: https://ssrn.com/abstract=302066 or http://dx.doi.org/10.2139/ssrn.302066

Masahiro Watanabe (Contact Author)

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

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