How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders

29 Pages Posted: 30 Sep 2005  

Todd B. Walker

Indiana University Bloomington - Department of Economics

Date Written: September 22, 2006

Abstract

Accommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher-order expectations. That is, rational investors are forced into a situation where they must forecast the forecasts of other agents (i.e., form higher-order expectations). In a dynamic setting, this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity. By employing the frequency domain approach of Whiteman (1983) and Kasa (2000), this paper demonstrates how information structures previously believed to lead to disparate expectations in equilibrium (e.g., Singleton (1987)) converge to a symmetric equilibrium. The "revealing" aspect of the price process lies in the invertibility of the observed state space, which makes it possible for agents to inferthe economically fundamental shocks, thus eliminating the need to forecast the forecasts of others.

Keywords: Asset Pricing, Asymmetric Information

JEL Classification: G12, D82

Suggested Citation

Walker, Todd B., How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders (September 22, 2006). CAEPR Working Paper No. 2006-011. Available at SSRN: https://ssrn.com/abstract=808284 or http://dx.doi.org/10.2139/ssrn.808284

Todd B. Walker (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Paper statistics

Downloads
107
Rank
208,445
Abstract Views
1,024