Forecasting the forecasts of others: Implications for asset pricing
Journal
Journal of Economic Theory
Subject
Finance
Publishing details
Publication Year
2012
Abstract
We study the properties of rational expectation equilibria (REE) in dynamic asset pricing models with heterogeneously informed agents. We show that under mild conditions the state space of such models in REE can be infinite dimensional. This result indicates that the domain of analytically tractable dynamic models with asymmetric information is severely restricted. We also demonstrate that even though the serial correlation of returns is predominantly determined by the dynamics of stochastic equity supply, under certain circumstances asymmetric information can generate positive autocorrelation of returns.
Keywords
Asset pricing; Asymmetric information; Higher order expectations; Momentum
Available on ECCH
No
