Big Data

Beauty Contests And Asset Prices Under Asymmetric Information

Download Now Date Added: Jan 2010
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In this paper, the authors study a dynamic Gaussian financial market model in which the traders form higher-order expectations about the fundamental value of a single risky asset. Rational uninformed traders are introduced into an otherwise standard differential information economy to investigate the impact of asymmetric information. In a two-period economy, there is a unique linear equilibrium; beauty contests under asymmetric information do not introduce excess volatility driven by self-fulfilling multiple equilibria. Under certain conditions, there is a no monotonic relationship between price volatility and the proportion of uninformed traders.