The More We Know, the Less We Agree: Public Announcements and Higher-Order Expectations
FMG Discussion Papers 532
33 Pages Posted: 2 Mar 2005 Last revised: 7 May 2009
Date Written: February 1, 2005
Abstract
The stylized fact that public announcements in financial markets are followed by intense trading, high trading volume and volatile prices, is widely perceived as the sign of increasing disagreement due to the announcement. However, it is common to argue that this would be inconsistent with Bayesian-learning and common priors. In this paper, we not only show that - with certain information structures - increasing disagreement is possible in a Bayesian model, but we also argue that with the assumption that traders trade for resale - so they try to second guess future traders' guesses - there are information structures which are simple, intuitive and plausible and result in increasing disagreement even in a standard, multi-period Grossman-Stiglitz model.
Keywords: Confirmatory bias, public announcements, trading volume, higher-order expectations
JEL Classification: D82, D84, G11, G12
Suggested Citation: Suggested Citation