Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry

Masahiro Watanabe

Journal of Finance, 2008, vol. 63, issue 1, 229-272

Abstract: This paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns—even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend‐followers, while better informed agents follow contrarian strategies. Trading volume has a hump‐shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6261.2008.01315.x

Related works:
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:bla:jfinan:v:63:y:2008:i:1:p:229-272

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().