Multidimensional Noise and Non-Fundamental Information Diversity

David Russ

No 201, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: In this paper, I relax the common assumption of the one-dimensionality of noise made in the standard competitive noisy rational expectations framework. Within an environment characterized by multidimensional noise, I explore the strategic interactions between di erent traders that are informed about di erent components of the noise inherent in the market price. I find that agents' trades against di erent types of noise are complements due to an inference augmentation e ect. As one group trades more aggressively against the part of the noise they observe, the market price becomes a more precise signal for fundamentals for the other noise-informed groups. Since traders use their information about noise together with the market price in order to infer information about fundamentals, this makes the other groups trade more aggressively against their observed piece of noise, too. Strategic complementar- ities can also be found in the information market. Both acquiring information about the same type and about di erent types of noise can be complements.

Keywords: Rational Expectations Equilibrium; Complementarities; Noise Trading; Non-Fundamental Information. (search for similar items in EconPapers)
JEL-codes: C62 D53 G12 G40 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-12
New Economics Papers: this item is included in nep-mst
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https://bgpe.cms.rrze.uni-erlangen.de/files/2023/0 ... mation-Diversity.pdf First version, 2020 (application/pdf)

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