scholarly journals Dynamic Noisy Rational Expectations Equilibrium With Insider Information

Econometrica ◽  
2020 ◽  
Vol 88 (6) ◽  
pp. 2697-2737
Author(s):  
Jerome Detemple ◽  
Marcel Rindisbacher ◽  
Scott Robertson
Keyword(s):  
Private Information ◽  
Rational Expectations ◽  
Absolute Risk ◽  
Asset Price ◽  
Public Information ◽  
Noise Traders ◽  
Insider Information ◽  
Special Cases ◽  
Non Gaussian ◽  
Partial Communication

We study equilibria in multi‐asset and multi‐agent continuous‐time economies with asymmetric information and bounded rational noise traders. We establish the existence of two equilibria. First, a full communication equilibrium where the informed agents' signal is disclosed to the market and static policies are optimal. Second, a partial communication equilibrium where the signal disclosed is affine in the informed and noise traders' signals, and dynamic policies are optimal. Here, information asymmetry creates demand for two public funds, as well as a dark pool where private information trades can be implemented. Markets are endogenously complete and equilibrium returns have a three factor structure with stochastic factors and loadings. Results are valid for constant absolute risk averse investors, general vector diffusions for fundamentals, nonlinear terminal payoffs, and non‐Gaussian noise trading. Asset price dynamics and public information flows are endogenous, and rational expectations equilibria are special cases of the general results.

The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

Normalized shaping regularization for robust separation of blended data

Geophysics ◽  
2019 ◽  
Vol 84 (5) ◽  
pp. V281-V293 ◽  
Author(s):  
Qiang Zhao ◽  
Qizhen Du ◽  
Xufei Gong ◽  
Xiangyang Li ◽  
Liyun Fu ◽  
...  
Keyword(s):  
Cost Savings ◽  
High Amplitude ◽  
Data Consistency ◽  
Common Source ◽  
Ocean Bottom ◽  
Special Cases ◽  
Non Gaussian ◽  
Blended Data ◽  
Power Line Noise ◽  
Simultaneous Source

Simultaneous source acquisition has attracted more and more attention from geophysicists because of its cost savings, whereas it also brings some challenges that have never been addressed before. Deblending of simultaneous source data is usually considered as an underdetermined inverse problem, which can be effectively solved with a least-squares (LS) iterative procedure between data consistency ([Formula: see text]-norm) and regularization ([Formula: see text]-norm or [Formula: see text]-norm). However, when it comes to abnormal noise that follows non-Gaussian distribution and possesses high-amplitude features (e.g., erratic noise, swell noise, and power line noise), the [Formula: see text]-norm is a nonrobust statistic that can easily lead to suboptimal deblended results. Although abnormal noise can be attenuated in the common source domain at first, it is still challenging to apply a coherency-based filter due to the sparse receiver or crossline sampling, e.g., that commonly found in ocean bottom node (OBN) acquisition. To address this problem, we have developed a normalized shaping regularization to make the inversion-based deblending approach robust for the separation of blended data when abnormal noise exists. Its robustness comes from the normalized shaping operator defined by the confidence interval of normal distribution, which minimizes the abnormal risk to a normal level to satisfy the assumption of LS shaping regularization. In special cases, the proposed approach will revert to the classic LS shaping regularization once the normalized coefficient is large enough. Experimental results on synthetic and field data indicate that the proposed method can effectively restore the separated records from blended data at essentially the same convergence rate as the LS shaping regularization for the abnormal noise-free scenario, but it can obtain better deblending performance and less energy leakage when abnormal noise exists.

Nonrevealing Equilibria and Consumption-Based Asset Pricing Models

2006 ◽  
Vol 6 (1) ◽  
Author(s):  
James E Gunderson
Keyword(s):  
Asset Pricing ◽  
Private Information ◽  
Rational Expectations ◽  
Investment Risk ◽  
Conditional Distributions ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Empirical Tests ◽  
The Impact ◽  
Investment Choices

In the rational expectations equilibrium of this paper, agents have private information and differing information partitions and therefore assign differing conditional distributions to asset payoffs and other economic variables relevant to their investment choices. Standard asset pricing models typically do not recognize the impact of these differing information partitions, and empirical tests based on these models thus measure asset riskiness in a way that may not be relevant to any of the agents' decisions. I show how this can lead to distorted estimates of investment risk and how it can make the equity premium appear difficult to explain.

Investors overconfidence behaviour at Bombay Stock Exchange

2018 ◽  
Vol 14 (5) ◽  
pp. 613-632 ◽  
Author(s):  
Venkata Narasimha Chary Mushinada ◽  
Venkata Subrahmanya Sarma Veluri
Keyword(s):  
Private Information ◽  
Trading Volume ◽  
Negative Impact ◽  
Stock Exchange ◽  
Public Information ◽  
Response Analysis ◽  
Content Type ◽  
Daily Data ◽  
Level Data ◽  
Attribution Bias

PurposeThe purpose of the paper is to empirically test the overconfidence hypothesis at Bombay Stock Exchange (BSE).Design/methodology/approachThe study applies bivariate vector autoregression to perform the impulse-response analysis and EGARCH models to understand whether there is self-attribution bias and overconfidence behavior among the investors.FindingsThe study shows the empirical evidence in support of overconfidence hypothesis. The results show that the overconfident investors overreact to private information and underreact to the public information. Based on EGARCH specifications, it is observed that self-attribution bias, conditioned by right forecasts, increases investors’ overconfidence and the trading volume. Finally, the analysis of the relation between return volatility and trading volume shows that the excessive trading of overconfident investors makes a contribution to the observed excessive volatility.Research limitations/implicationsThe study focused on self-attribution and overconfidence biases using monthly data. Further studies can be encouraged to test the proposed hypotheses on daily data and also other behavioral biases.Practical implicationsInsights from the study suggest that the investors should perform a post-analysis of each investment so that they become aware of past behavioral mistakes and stop continuing the same. This might help investors to minimize the negative impact of self-attribution and overconfidence on their expected utility.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the investors’ overconfidence behavior at market-level data in BSE, India.

Cooperative Homo economicus

2011 ◽  
Author(s):  
Samuel Bowles ◽  
Herbert Gintis
Keyword(s):  
Private Information ◽  
Repeated Games ◽  
Evolutionary Dynamics ◽  
Public Information ◽  
Folk Theorem ◽  
The Self ◽  
Correlated Equilibrium ◽  
Homo Economicus ◽  
Self Interest ◽  
Game Theoretic

This chapter examines whether recent advances in the theory of repeated games, as exemplified by the so-called folk theorem and related models, address the shortcomings of the self-interest based models in explaining human cooperation. It first provides an overview of folk theorems and their account of evolutionary dynamics before discussing the folk theorem with either imperfect public information or private information. It then considers evolutionarily irrelevant equilibrium as well as the link between social norms and the notion of correlated equilibrium. While the insight that repeated interactions provide opportunities for cooperative individuals to discipline defectors is correct, the chapter argues that none of the game-theoretic models mentioned above is successful. Except under implausible conditions, the cooperative outcomes identified by these models are neither accessible nor persistent, and are thus labeled evolutionarily irrelevant Nash equilibria.

Ambiguity in Insider Trading Regulations: Saudi Arabia as a Case Study

2020 ◽  
Vol 34 (4) ◽  
pp. 408-427
Author(s):  
Yahya A. Alomari
Keyword(s):  
Saudi Arabia ◽  
Insider Trading ◽  
Public Information ◽  
Case Law ◽  
Insider Information ◽  
The Law ◽  
Definition Of ◽  
Criminal Conduct ◽  
Material Information

Abstract The Saudi legal system recognises insider trading as a crime and has established laws in order to prevent it. Yet, the complicated nature of insider trading makes it challenging to enact regulations that cover all of the aspects of the crime and clearly identify criminal conduct. This article analyses insider trading regulations in Saudi Arabia and addresses their ambiguities. This article specifies current Saudi regulations pertaining to the crimes of insider trading and disclosing material information, as well as analysing both crimes. It addresses ambiguities found in the language of the law as well as in case law. This article also criticises the definition of insider information under the law. The issue of ‘use’ versus ‘possession’ is discussed: namely, whether what is prohibited is trading on the basis of material non-public information or trading while in possession of material non-public information.

Rules versus Discretion in Bank Resolution

2020 ◽  
Vol 33 (12) ◽  
pp. 5594-5629 ◽  
Author(s):  
Ansgar Walther ◽  
Lucy White
Keyword(s):  
Private Information ◽  
Optimal Policy ◽  
Financial Crises ◽  
Public Information ◽  
Time Inconsistency ◽  
Bank Resolution ◽  
Public Signals ◽  
Rules Versus Discretion

Abstract Recent reforms have given regulators broad powers to “bail-in” bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signaling negative private information to creditors. Therefore, optimal bail-ins in bad times only depend on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.

Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?

2019 ◽  
Vol 19 (2) ◽  
Author(s):  
Shou Chen ◽  
Shengpeng Xiang ◽  
Hongbo He
Keyword(s):  
Absolute Risk ◽  
Hyperbolic Discounting ◽  
Time Preferences ◽  
Hjb Equations ◽  
Portfolio Decisions ◽  
Special Cases ◽  
Intertemporal Consumption ◽  
Hamilton Jacobi Bellman ◽  
Hara Utility ◽  
Exponential Discounting

Abstract We study the intertemporal consumption and portfolio rules in the model with the general hyperbolic absolute risk aversion (HARA) utility. The equivalent approximation approach is employed to obtain the Hamilton-Jacobi-Bellman (HJB) equations, and a remarkable property is shown: portfolio rules are independent of the discount function. Moreover, both the consumption and portfolio rates are non-increasing functions of wealth. Particularly illustrative cases examined in detail are the models with the most adopted discount functions, including exponential discounting and hyperbolic discounting. Explicit solutions for intertemporal decisions are found for these special cases, revealing that individual’s time preferences affect the consumption rules only. Moreover, the time-consistent consumption rate under hyperbolic discounting is larger than its counterpart under exponential discounting.

Sign in / Sign up

Export Citation Format

Share Document