Costly Interpretation of Asset Prices

Xavier Vives, Liyan Yang and Jordi Mondria

No 12360, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Our setup predicts price momentum and yields excessive return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria.

Keywords: Investor sophistication; Price momentum; Asset prices; Complementarity (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-fmk, nep-mic and nep-mst
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Citations: View citations in EconPapers (8)

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Journal Article: Costly Interpretation of Asset Prices (2022)
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