Beauty Contests and Asset Prices under Asymmetric Information

Ryuichiro Ishikawa and Noritaka Kudoh

No 218, Discussion paper series. A from Graduate School of Economics and Business Administration, Hokkaido University

Abstract: In this paper, we study a dynamic Gaussian financial market model in which the traders form higher-order expectations about the fundamental value of a single risky asset. Rational uninformed traders are introduced into an otherwise standard differential information economy to investigate the impact of asymmetric information. In a two-period economy, there is a unique linear equilibrium; beauty contests under asymmetric information do not introduce excess volatility driven by self-fulfilling multiple equilibria. Under certain conditions, there is a nonmonotonic relationship between price volatility and the proportion of uninformed traders.

Keywords: higher-order expectations; asset prices; asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-01-24
New Economics Papers: this item is included in nep-cta, nep-fmk and nep-mst
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