The more we know on the fundamental, the less we agree on the price
Author(s): Péter Kondor
CEPR Discussion Paper Number 8455
Paper Details | PDF Download* | Purchase Electronic | Purchase Printed
Programme Area(s): Financial Economics (FE)
Date of Publication: 01/06/2011
Keyword(s): higher-order expectations, public announcement, trading volume
JEL(s): D82, D84, G11, G12
Abstract: I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.
* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org
Author(s): Péter Kondor
CEPR Discussion Paper Number 8455
Paper Details | PDF Download* | Purchase Electronic | Purchase Printed
Programme Area(s): Financial Economics (FE)
Date of Publication: 01/06/2011
Keyword(s): higher-order expectations, public announcement, trading volume
JEL(s): D82, D84, G11, G12
Abstract: I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.
* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org