Business Intelligence

Growth Forecasts, Belief Manipulation And Capital Markets

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Executive Summary

The authors analyze how a benevolent government agency would optimally release information about the growth rate of the stochastic dividend process of the financial market. They investigate the effects of the agency's signal on the agents' optimal strategies and equilibrium asset prices. In the case where all investors are rational Bayesian updaters, they show that the agency's optimal choice is to release a manipulative signal (lie) with probability one. However, if there are some nonupdating (inattentive) agents, they find cases where it is optimal for the government agency to send a revealing signal with probability one.

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