The more we know, the less we agree: public announcements and higher-order expectations

Péter Kondor

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

Abstract: The stylized fact that public announcements in financial markets are followed by intense trading, high trading volume and volatile prices, is widely perceived as the sign of increasing disagreement due to the announcement. However, it is common to argue that this would be inconsistent with Bayesian-learning and common priors. In this paper, we not only show that — with certain information structures — increasing disagreement is possible in a Bayesian model, but we also argue that with the assumption that traders trade for resale — so they try to second guess future traders’ guesses — there are information structures which are simple, intuitive and plausible and result in increasing disagreement even in a standard, multi-period Grossman—Stiglitz model.

Keywords: Confirmatory bias; Public announcements; Trading volume; Higher-order expectations; Short-term traders (search for similar items in EconPapers)
JEL-codes: D82 D84 G11 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://eprints.lse.ac.uk/24645/ Open access version. (application/pdf)

Related works:
Working Paper: The more we know, the less we agree: public announcements and higher-order expectations (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24645

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