Trading, Communication and the Response of Asset Prices to News

James Dow and Gary Gorton

Economic Journal, 1993, vol. 103, issue 418, 639-46

Abstract: The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn over time from market prices. The model introduces an information structure that is intended to capture the notion that information is difficult to interpret. Strategic interaction and the complexity of the information result in a protracted price response. Equilibrium price paths of the model may display reversals in which the two traders rationally revise their beliefs, first in one direction and then in the opposite direction, even though no new information has entered the system. Copyright 1993 by Royal Economic Society.

Date: 1993
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