We analyze myopic trader models of noisy prices in financial markets. Unlike extant analysis, such as De Long et al. (1990a), a classical equilibrium exists in our analysis, e.g., a riskless perpetuity is priced by arbitrage and its price does not vary with noise. A unique noisy equilibrium exists only when i) noise traders' beliefs are rational regarding volatility and irrational regarding expected returns, and ii) noise traders can hold infinite positions. In the absence of these strong assumptions, multiple noisy equilibria can coexist with the classical equilibrium, but these equilibria exhibit conflicting comparative statics. Furthermore, the price of a long-lived asset with risky cash flows can vary with noise even when investors are not myopic. One conclusion is that myopia is neither a necessary nor a sufficient condition for noisy prices. A second is that it is difficult, if not impossible, to use myopic trader models to derive implications for investment or regulatory policy.

Center for Research in Financial Services for financial support. The standard disclaimer applies. Optimal Financial Contracts for a Start-Up with Unlimited Operating Discretion This paper presents a model in which asymmetric information and extreme uncertainty lead to the exclusive use of equity and riskless debt for small business financing. The paper derives these results without any restrictions on the available contract space, the distribution function governing a project’s payoff, or the risk aversion of most potential entrepreneurs. Linear securities derive from the assumption that small business financing involves more uncertainty than is captured in most financial models. Instead of assuming that business people are faced with a given menu of projects, the model allows entrepreneurs to create (over time) an unlimited number of non-positive net present value projects with any payoff distribution they desire. Also, outside investors cannot observe project choice but only terminal cash flows. As a result, suppliers of funds must design contracts so that in equilibrium entrepreneurs do not wish to undertake undesirable investments. Further analysis of the model shows that in equilibrium entrepreneurs must contribute some