Open AccessThe Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories*
Author(s) -
Peter Bossaerts,
Cary Frydman,
John O. Ledyard
Publication year - 2013
Publication title -
european finance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.933
H-Index - 61
eISSN - 1573-692X
pISSN - 1382-6662
DOI - 10.1093/rof/rfs049
Subject(s) - private information retrieval , volatility (finance) , economics , rational expectations , asset (computer security) , bayesian game , bayesian probability , microeconomics , search theory , foundation (evidence) , econometrics , quality (philosophy) , revelation , complete information , mathematical economics , financial economics , game theory , computer science , repeated game , philosophy , epistemology , art , computer security , archaeology , literature , artificial intelligence , history
Two theoretical literatures, one using Bayesian Nash equilibrium (BNE), and the other using noisy rational expectations equilibrium (NREE), both provide a foundation for understanding how private information is impounded into asset prices, yet some of their predictions are conflicting. Here, we compare for the first time, the two theories using data from carefully controlled laboratory asset markets. In the dynamics, we find strong evidence for BNE theory, although final prices support predictions of the NREE theory. Finally, we document that price volatility increases when information is being impounded in prices.
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