We study an intertemporal asset market where insiders coexist with “non‐fundamental” speculators. Non‐fundamental speculators possess no private information on fundamental values of assets, but have superior knowledge about some aspect of the market environment. We show that the entry of these (rational) speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market. Also, equilibrium trades display patterns of empirical interest. For example, speculators appear to chase trends and lose money after market “overreactions,” while insiders trade as contrarians and profit after such overreactions.

The author studies an intertemporal asset market where insiders coexist with 'nonfundamental' speculators. Nonfundamental speculators possess no private information on fundamental values of assets but have superior knowledge about some aspect of the market environment. The author shows that the entry of these (rational) speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market. Also, equilibrium trades display patterns of empirical interest. For example, speculators appear to chase trends and lose money after market 'overreactions,' while insiders trade as contrarians and profit after such overreactions.

We investigate the structure of preferences and uncertainty that guarantees that prices are fully revealing even though asset markets are incomplete and there are more sources of uncertainty than assets in the economy. A sufficient condition for fully revealing prices is that investors have preferences of the (possibly state-dependent) linear-risk-tolerance class. Finally, we discuss how our result allows one to extend certain existing literature on demand aggregation, welfare analysis, and the pricing of contingent claims to the case in which markets are incomplete and investors have asymmetric private information.

We devise tests that distinguish between competitive (Walrasian), fully revealing rational expectations and noisy rational expectations equilibria based on their predictions concerning trading volume around public information signals. Empirical results strongly support the noisy rational expectations hypothesis. This indicates that a significant amount of noise exists (so that private information has value), but not enough to obfuscate entirely the information content of price. Our analysis also indicates that the dispersion of private information across traders has an impact on trading volume, but not on price.

The authors investigate the structure of preferences and uncertainty that guarantees that prices are fully revealing even though asset markets are incomplete and there are more sources of uncertainty than assets in the economy. A sufficient condition for fully revealing prices is that investors have preferences of the (possibly state-dependent) linear-risk-tolerance class. Finally, the authors discuss how their result allows one to extend certain existing literature on demand aggregation, welfare analysis, and the pricing of contingent claims to the case in which markets are incomplete and investors have asymmetric private information.

We devise tests that distinguish between competitive (Walrasian), fully revealing rational expectations and noisy rational expectations equilibria based on their predictions concerning trading volume around public information signals. Empirical results strongly support the noisy rational expectations hypothesis. This indicates that a significant amount of noise exists (so that private information has value), but not enough to obfuscate entirely the information content of price. Our analysis also indicates that the dispersion of private information across traders has an impact on trading volume, but not on price.