This paper develops a microstructure model which describes the way in which private information is incorporated into financial market prices via a Bayesian learning process used by agents. The paper shows how a latent process which represents information arrival can be inferred from observed...

We study the questions of optimal portfolios and hedging strategies in a market where the asset log-price Y follows a diffusion model whose coefficients are unobservable and are given in terms of a Markov process X. This leads naturally to a partial information setup, where the strategies are...

When the design of an artifact is quot;modularized,quot; the elements of the design are split up and assigned to modules according to a formal architecture or plan. Some of the modules are quot;hidden,quot; meaning that design decisions in those modules do not affect decisions in other modules;...

This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with...

Many practitioners point out that the speculative profits of institutional traders are eroded by the difficulty in gauging the price impact of their trades. In this paper, we develop a model of strategic trading where speculators face such a dilemma because of incomplete information about...

The paper presents a theoretical and empirical analysis of learning in a prediction market. The paper presents necessary and sufficient conditions for prices to converge to the probability of an event as information is incorporated into the market. The theoretical results are augmented with...

We consider an experimental setting where traders in stock markets or exchange rate markets receive one stylized piece of information at a time about the value of an asset. We find that having limited knowledge about the prior distribution of true asset values does not hamper the decision making...

We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with...