Equilibrium Price with Institutional Investors and with Naive Traders

Abstract

This paper uses a competitive equilibrium model to study how institutional investors influence the volatility and the informativeness of asset prices. Institutional investors are assumed to be ``rational'' informed traders while individual investors are supposed to be ``naive'' informed traders, insofar as the former use the equilibrium price to extract information while the latter do not. The paper compares the informativeness and the volatility of the equilibrium price in an economy where the informed traders are naive and in one where they are rational, and investigates how the price characteristics react to changes in the parameters, in particular in the number of informed traders.

JEL Classification: G14