The more we know on the fundamental, the less we agree on the price

Péter Kondor

No 8455, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.

Keywords: Higher-order expectations; Public announcement; Trading volume (search for similar items in EconPapers)
JEL-codes: D82 D84 G11 G12 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-cba, nep-cta and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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