Forecasting the forecasts of others: Implications for asset pricing

Igor Makarov and Oleg Rytchkov

Journal of Economic Theory, 2012, vol. 147, issue 3, 941-966

Abstract: We study the properties of rational expectation equilibria (REE) in dynamic asset pricing models with heterogeneously informed agents. We show that under mild conditions the state space of such models in REE can be infinite dimensional. This result indicates that the domain of analytically tractable dynamic models with asymmetric information is severely restricted. We also demonstrate that even though the serial correlation of returns is predominantly determined by the dynamics of stochastic equity supply, under certain circumstances asymmetric information can generate positive autocorrelation of returns.

Keywords: Asset pricing; Asymmetric information; Higher order expectations; Momentum (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:3:p:941-966

DOI: 10.1016/j.jet.2012.01.020

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