Costly Interpretation of Asset Prices
Xavier Vives () and
No 12360, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Compared to the standard rational expectations equilibrium, our setup features price momentum and yields higher return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. Investors tend to over-acquire sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria.
Keywords: asset prices; disagreement; Investor sophistication; multiplicity; noise trading; trading volume; welfare (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mic and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12360
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12360
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().