The paper contrasts theories that explain diverse belief by asymmetric private information (in short PI) with theories which postulate agents use subjective heterogenous beliefs (in short HB). We focus on problems where agents forecast aggregates such as profit rate of the Samp;P500 and our...

Can prices convey information about the fundamental value of an asset? This paper considers this problem in relation to the dynamic properties of the fundamental (whether it is constant or time-varying) and the structure of information available to agents. Risk-averse traders receive two...

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...

Through extending a standard Grossman and Stiglitz (1980) noisy rational expectations economy by a heterogeneous signal structure with signal-specific differences in uncertainty, we show that price momentum as well as reversal are not intrinsically at odds with rational behavior. Differences in...

If investors are differently informed about the payoff of market-traded securities, then the traditional market portfolio is not a relevant benchmark for testing the CAPM. Each investor appraises expected returns and builds his optimal portfolio conditionally on his information. Which proxy to...

Modest differences in higher-order beliefs may have large price effects. We generalize a standard rational expectations equilibrium model with different information by allowing differences in higher-order beliefs. Investors have possibly different dogmatic beliefs about the mean, different...

During currency crises, large traders once simultaneously short the asset markets and currency market. We study the large trader's information manipulation in crises by introducing a large trader in an asset market and a currency-attack coordination game with imperfect information. The asset...

We present a model to study the role of earnings management in explaining the properties of asset prices and stock market participation. We demonstrate that limited market participation can arise endogenously in the presence of earnings management. Our model generates novel predictions on how...

We derive a separation theorem: investors hold a common risk-adjusted market portfolio regardless of their information sets, and a portfolio based upon their private signals. This implies that investors have non-negligible holdings of assets they know little about, so nonparticipation remains a...

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings...