Asymmetric Information and Endogeneous Stock Price Volatility: An Asset Pricing Model of Sunspot Equibria

Shin-ichi Fukuda ()

Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: Introducing informational asymmetry, this paper shows that endogeneous stock price fluctuations may make the stock price highly volatile in a present value model. In the analysis, we assume that the firm's productivity is stochastic and can be good type or bad type. We also assume that the firm puts up its asset, net worth, as collateral. Under these circumstances, the informational asymmetry may introduce agency costs that bad firms invest the funds in a negative present value project. In additon, the self-selection mechanism rules out bad firms if and only if the stock price is expected to be high. Consenquently, the stock price boom is self-fulfilled when the stock price is expected to be high, while the slump is self-fulfilled when it is expected to be low. In particular, stationary sunspot equilibria become more outcome in a present value model of stock price.

Date: 1994-08
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a296

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