Journal of Financial Economics Vol. 117 No. 2 2015
Signal or noise? Uncertainty and learning about whether other traders are informed
Abstract
We develop a model where some investors are uncertain whether others are trading on informative signals or noise. Uncertainty about others leads to a nonlinear price that reacts asymmetrically to news. We incorporate this uncertainty into a dynamic setting where traders gradually learn about others and show that it generates empirically relevant return dynamics: expected returns are stochastic but predictable, and volatility exhibits clustering and the “leverage” effect. The model nests both the rational expectations (RE) and differences of opinions (DO) approaches and highlights a link between disagreement about fundamentals and uncertainty about other traders.
- DOI
- 10.1016/j.jfineco.2015.05.003
- Volume
- 117
- Issue
- 2
- Pages
- 398-423
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref