How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders

Todd Walker

No 2006-011, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Accommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher-order expectations. That is, rational investors are forced into a situation where they must forecast the forecasts of other agents. In a dynamic setting, this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity. By using the frequency domain approach of Whiteman (1983) and Kasa (2000), this paper demonstrates how information structures previously believed to preserve asymmetric information in equilibrium, converge to a symmetric information, rational expectations equilibrium. The revealing aspect of the price process lies in the invertibility of the observed state space, which makes it possible for agents to infer the economically fundamental shocks and thus eliminating the need to forecast the forecasts of others.

Keywords: Asset Pricing; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 G12 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-09
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: How equilibrium prices reveal information in a time series model with disparately informed, competitive traders (2007)
Working Paper: How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders (2005)
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