The Impact of Heterogeneous Signals on Stock Price Predictability in a Strategic Trade Model

Christoph Winter ()
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Christoph Winter: University of Basel

Working papers from Faculty of Business and Economics - University of Basel

Abstract: Generalizing the idea that price momentum can be explained by dierent levels of uncertainty inherent in the information structure, we implement signal-specic dierences in uncertainty in a Kyle type model of strategic trading. We derive the equilibrium in a single-auction setting as well as a two-trading-period model. We show that the two-period equilibrium supports price patterns like momentum and reversal/under- and over-reaction without relying on any additional behavioral assumptions. Furthermore, the two-period setting can be extended to a multiple- trading-period equilibrium model with very similar equilibrium conditions to the original sequential auction equilibrium proposed by Kyle (1985), while preserving the price pattern of the two-period model.

Keywords: Market structure; asset pricing; market efficiency; asymmetric information; equilibrium (search for similar items in EconPapers)
JEL-codes: D43 D82 G12 G15 (search for similar items in EconPapers)
Date: 2018-07-16
New Economics Papers: this item is included in nep-des
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2018/22

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