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Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry
Author(s) -
WATANABE MASAHIRO
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01315.x
Subject(s) - contrarian , volatility (finance) , economics , uncorrelated , stock (firearms) , dividend , information asymmetry , econometrics , overlapping generations model , stock price , financial economics , monetary economics , microeconomics , finance , mathematics , statistics , engineering , mechanical engineering , paleontology , series (stratigraphy) , biology
This paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns—even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend‐followers, while better informed agents follow contrarian strategies. Trading volume has a hump‐shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium.