Dynamic Trading and Asset Prices: Keynes vs. Hayek

Giovanni Cespa and Xavier Vives

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model. We look at the bias of prices as estimators of fundamental value in relation to traders' average expectations and note that prices are more (less) biased than average expectations if and only if traders over- (under-) rely on public information with respect to optimal statistical weights. We find that prices are biased in relation to average expectations whenever traders speculate on short-run price move- ments. In a market with long term traders, over-reliance on public information obtains if noise trade increments are correlated enough and/or there is low enough residual uncertainty in the payoff. This defines a “Keynesian” region; the complementary region is “Hayekian” in that prices are less biased than average expectations in the estimation of fundamental value. The standard case of no residual uncertainty and noise trading following a random walk is on the frontier of the two regions. With short-term traders there typically are two equilibria, with the stable (unstable) one displaying over- (under-) reliance on public information.

Keywords: Price bias; long and short-term trading; multiple equilibria; average expectations; higher order beliefs; over-reliance on public information. (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2008-01-01
New Economics Papers: this item is included in nep-cfn, nep-mst and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Review of Economic Studies (2012) 79 (2): 539-580.

Downloads: (external link)
http://www.csef.it/WP/wp191.pdf (application/pdf)

Related works:
Journal Article: Dynamic Trading and Asset Prices: Keynes vs. Hayek (2012)
Working Paper: Dynamic Trading and Asset Prices: Keynes vs. Hayek (2009)
Working Paper: Dynamic Trading and Asset Prices: Keynes vs. Hayek (2009)
Working Paper: Dynamic trading and asset prices: Keynes vs. Hayek (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:191

Access Statistics for this paper

More papers in CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy Contact information at EDIRC.
Bibliographic data for series maintained by Dr. Maria Carannante ().