Multi-asset noisy rational expectations equilibrium with contingent claims

Georgy Chabakauri, Kathy Yuan and Konstantinos Zachariadis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow-Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.

Keywords: asymmetric information; learning from prices; multi-asset economy; Paul Woolley Centre (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2022-10-01
New Economics Papers: this item is included in nep-upt
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Published in Review of Economic Studies, 1, October, 2022, 89(5), pp. 2445 - 2490. ISSN: 0034-6527

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http://eprints.lse.ac.uk/111974/ Open access version. (application/pdf)

Related works:
Journal Article: Multi-asset Noisy Rational Expectations Equilibrium with Contingent Claims (2022)
Working Paper: Multi-asset noisy rational expectations equilibrium with contingent claims (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:111974

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