Private Information and Sunspots in Sequential Asset Markets∗

We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully revealing rational expectations equilibria, there exists a continuum of equilibrium prices consistent with rational expectations, where the asset prices are subject to sunspot shocks. Such sunspot shocks can generate persistent fluctuations in asset prices that look like a random walk in an effi cient market.