We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model with long-term investors. We argue that the fact that prices can score worse or better than consensus opinion in predicting the fundamentals is a product of endogenous short-term speculation. For a given, positive level of residual payoff uncertainty, if noise tra...

In order to explore the incentives for information acquisition in financial markets, a model of the joint information and portfolio choice is developed. Investors are allowed to acquire a number of signals that inform about a risky asset’s dividend, and “informational efficiency” is defined as a social planner’s preferred signal allocation. If dividends are Gaussian, utility is CARA, and prices...

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other inves...

Information, Diversification, and Cost of Capital We study the pricing implications of information in a noisy rational expectations model with a factor structure for multi-asset payoffs. There are two classes of price taking investors in our model; informed investors who receive private signals on asset payoffs, and uninformed investors who draw imperfect inferences about those signals from pri...

Recently, investment in high technology companies boomed as people invested large sums of money even when there was little chance of the company being profitable. This is contrary to classical beliefs that investors have rational expectations and maximise their utility. Instead we must consider the idea that people are irrational and make decisions for many reasons, few of which involve a judic...

Grossman (1976) shows how market prices aggregate private information. In this paper I show how trading volume helps investors to interpret the aggregate information in the price. I construct a model where investors trade for two reasons: private information and risk sharing. When trading volume is high, investors know that private signals are dispersed. They therefore weight the market price h...

An “average investor” is an investor who has “average risk aversion”, “average expectations” on the market returns and should invest in the “market portfolio” (this is, according to the Capital Asset Pricing Model, the best possible portfolio for such an investor). He is compared with a “non-average investor”. This—in our setting—is an investor who has the same “average risk aversion” but inves...

This paper proves the existence of fully-revealing rational expectations equilibria for almost all sets of beliefs when investors are ambiguity averse and have preferences that are characterized by Choquet expected utility. The result implies that strong-form efficient equilibrium prices exist even when many investors in the market make use of information in a way that is substantially differen...