Volatility, Information and Noise Trading

Jean-Pierre Danthine and Serge Moresi

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: We construct a dynamic competitive model with futures markets where price volatility comes from information arrival and noise trading. In this model, we address three issues: What does informational efficiency mean in a multi-period setting? How do information arrival and noise trading interact to generate price volatility? What are the effects of futures trading on volatility and welfare? Without noise trading, we show that a fully revealing equilibrium price is unlikely to exist if information flows are serially correlated. If it exists, futures trading affects the time pattern of volatility, but volatility over time sums up to a constant. Information arrival has ambiguous welfare effects and the desirability of a futures market may be controversial. With noise trading, total volatility over time increases with the noise variance but it is reduced by information arrival. The period volatility may now be reduced by the arrival of information as prices are less responsive to noise trading.

Keywords: Futures; Volatility; Information; Noise Trading; Welfare (search for similar items in EconPapers)
Date: 1990-11
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Related works:
Journal Article: Volatility, information and noise trading (1993)
Working Paper: Volatility, Information, and Noise Trading (1990)
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