The More We Know on the Fundamental, the Less We Agree on the Price

65 Pages Posted: 20 Jul 2011

See all articles by Peter Kondor

Peter Kondor

London School of Economics & Political Science (LSE); Central European University (CEU)

Date Written: June 2011

Abstract

I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.

Keywords: higher-order expectations, public announcement, trading volume

JEL Classification: D82, D84, G11, G12

Suggested Citation

Kondor, Peter and Kondor, Peter, The More We Know on the Fundamental, the Less We Agree on the Price (June 2011). CEPR Discussion Paper No. DP8455, Available at SSRN: https://ssrn.com/abstract=1889958

Peter Kondor (Contact Author)

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://fmg.lse.ac.uk/~kondor

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