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

48 Pages Posted: 15 Feb 2007 Last revised: 10 Dec 2013

See all articles by Masahiro Watanabe

Masahiro Watanabe

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

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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. Accurate information increases the stock-return volatility and correlation 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. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=962967

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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