Differential information and excessive volatility in financial markets

Torben M. Andersen
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Torben M. Andersen: University of Aarhus, Denmark

Finnish Economic Papers, 1992, vol. 5, issue 1, 3-11

Abstract: It is analysed whether risk averse agents possessing different information have an incentive to trade in a zero-sum market. The key to generate trading in a zero-sum speculative market is whether expectations are »homogenized» through the trading process. If not, trading will take place and all agents expect to be able to exploit private information not fully revealed by market prices to make a speculative profit. The existence of a rational expectations equilibrium with heterogenous expectations is proven to exist, and shown to imply excessive volatility ofprices and trading volumes.

Date: 1992
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