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Review of Finance Vol. 18 No. 1 2014

The Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories

Peter Bossaerts; Cary Frydman; John Ledyard

1 HSS and CNS, California Institute of Technology; 2Marshall School of Business, University of Southern California; 3HSS, California Institute of Technology

open access

Abstract

Two theoretical literatures, one using Bayesian Nash equilibrium (BNE), and the other using noisy rational expectations equilibrium (NREE), both provide a foundation for understanding how private information is impounded into asset prices, yet some of their predictions are conflicting. Here, we compare for the first time, the two theories using data from carefully controlled laboratory asset markets. In the dynamics, we find strong evidence for BNE theory, although final prices support predictions of the NREE theory. Finally, we document that price volatility increases when information is being impounded in prices.

DOI
10.1093/rof/rfs049
Volume
18
Issue
1
Pages
1-22
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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