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TRADING BEHAVIOR AND ASSET PRICING UNDER HETEROGENEOUS EXPECTATIONS

Gadjah Mada International Journal of Business

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Title TRADING BEHAVIOR AND ASSET PRICING UNDER HETEROGENEOUS EXPECTATIONS
 
Creator Sartono, R. Agus
 
Subject asset price behavior; cash flow innovations; heterogeneous expectations; informed traders; market depth
 
Description This research models trading behavior and examines the impact of heterogeneous expectations on asset prices. We extend Kyle’s (1985) one-period model to two-period model. The model shows that the informed trader takes into account not only the private information but also the pricing function. The price is an increasing function of the volatility of the asset value and decreasing in the volatility of uninformed traders’ demand. The costly information acquisition has an impact on the optimum demand but it has no direct impact on the price.We find the market depth is a linear function of the volatility of the uninformed traders and a weighted average of the total error variance of information. The depth is also decreasing in the volatility of the cash flow innovations. This argument is in line with the second finding, when the volatility of cash flow innovations increases, the value of risky asset becomes more volatile, and as a result the bigger are the advantages of having private information. Our research raises some questions for further investigation. We indirectly assume that the informed traders make a profit at the expense on the uninformed traders. The question is why the uninformed traders willing to face losses? What happen if there are n informed traders who have diverse information?
 
Publisher Master of Management, Faculty of Economics and Business, Universitas Gadjah Mada
 
Date 2005-06-12
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://journal.ugm.ac.id/gamaijb/article/view/5567
10.22146/gamaijb.5567
 
Source Gadjah Mada International Journal of Business; Vol 7, No 1 (2005): January-April; 15-39
2338-7238
1411-1128
 
Language eng
 
Relation http://journal.ugm.ac.id/gamaijb/article/view/5567/4538