A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.
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This article shows that introducing derivative assets increases incentives to collect information about asset payoffs. The increase in information collection makes the price of the underlying asset more informative and causes the expected price to increase. Extending the model to a dynamic setting with multiple risky assets, we find the introducing derivative assets for one asset increases the expected prices of positively correlated assets and reduces price reaction to future earnings announcements. These findings are consistent with the bulk of the empirical evidence on the relationship between the introduction of derivative assets and the behavior of asset prices.
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Hellwig's (1980) model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset, or by trading in a derivative asset. With multiple trading sessions, uninformed investors behave as rational trend followers, while more informed investors follow a contrarian strategy. As trading becomes continuous, Pareto efficiency is achieved. With trading in an appropriate derivative security, Pareto efficiency may be achieved in only a single round of trading. All derivative claims are then priced on Black and Scholes (1973) principles and, in the absence of further supply shocks, no trading will take place in subsequent trading rounds.
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We analyze the effects of differences of opinion on the dynamics of trading volume in stocks and options. We find that disagreements about the mean of the current- and next-period public information lead to trading in stocks in the current period but have no effect on options trading. Without options, we find that disagreements about the precision of all past and current public information affect trading in stocks in the current period. With options, only disagreements about the precisions of the next- and current-period information affect stocks and options trading in the current period. Our results suggest that options trading is concentrated around information events that are likely to cause disagreements among investors, whereas trading in stocks may be diffusive over many periods.
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This article develops a model of international equity portfolio investment flows based on differences in informational endowments between foreign and domestic investors. It is shown that, when domestic investors possess a cumulative information advantage over foreign investors about their domestic market, investors tend to purchase foreign assets in periods when the return on foreign assets is high and to sell when the return is low. The implications of the model are tested using data on U.S. equity portfolio flows.
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We demonstrate that limited participation can arise endogenously in the presence of model uncertainty and heterogeneous uncertainty-averse investors. When uncertainty dispersion among investors is small, full participation prevails in equilibrium. Equity premium is related to the average uncertainty among investors and a conglomerate trades at a price equal to the sum of its single-segment components. When uncertainty dispersion is large, investors with high uncertainty choose not to participate in the stock market, resulting in limited market participation. When limited participation occurs, participation rate and equity premium can decrease in uncertainty dispersion and a conglomerate trades at a discount. Copyright 2005, Oxford University Press.
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This article studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, "sidelined" investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to (1) negative skewness following price run-ups and positive skewness following price rundowns (even though the model is ex ante symmetric), (2) a lack of correspondence between large price changes and the arrival of external information, and (3) increases in volatility following large price changes. Copyright 2002, Oxford University Press.
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