Working Paper: NBER ID: w1897
Authors: Kenneth J. Singleton
Abstract: This paper examines the time series properties of the price of a risky asset implied by a model in which competitive traders are heterogeneously informed about the underlying sources of uncertainty in the economy.Traders do not observe the shocks in the period they occur. However, traders are imperfectly and heterogeneously informed about these shocks for three reasons:(1) the shocks are serially correlated arid hence partially forecast able from their past history, (2) each trader receives private signals about the current values of a subset of the shocks, and (3) the equilibrium price conveys information about the private signals and beliefs of other traders. Since prices convey information in this economy, traders will face an infinite regress problem in expectations associated with their desire to forecast the beliefs of others, the beliefs of others about average beliefs, etc.The equilibrium time series representation for the price of the risky security is deduced in various imperfect information environments. Then the volatility and autocorrelations of prices in this model are compared to the corresponding statistics for a model in which agents are homogeneously informed.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average forecast across traders with disparate information sets (D84) | equilibrium price of the risky asset (G19) |
| information disparity (I24) | price volatility (G13) |
| quality of information available to traders (D83) | variances and autocorrelations of asset prices (C22) |
| lower risk aversion among certain traders (D81) | reduced price variability (E39) |
| disparate expectations (D84) | variations in price volatility (E30) |
| disparate expectations (D84) | autocorrelations of asset prices (C22) |