Net trade and market efficiency in Grossman and Stiglitz (1980)

Hui Ou-Yang and Weili Wu ()

Journal of Economic Theory, 2017, vol. 167, issue C, 75-85

Abstract: In this paper, we correct part (b) of Theorem 6 of Grossman and Stiglitz (GS, 1980). We demonstrate that when the private signal tends to be perfect, the market converges to strong-form efficiency, and thus informed and uninformed traders have almost homogeneous beliefs about the stock payoff, but there is still significant net trade, rather than no trade as erroneously shown by GS. We further show that when the stock price becomes more informative, and thus traders' beliefs about the stock payoff become closer, the net trade may increase.

Keywords: Net trade; Traders' beliefs; Market efficiency; The Grossman–Stiglitz model (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:167:y:2017:i:c:p:75-85

DOI: 10.1016/j.jet.2016.10.006

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