The e¤ects of public information with asymmetrically informed short-horizon investors

This paper analyzes the e¤ects of public information in a perfect competition trading model populated by asymmetriclly informed short-horizon investors who have di¤ering private information precisions. We …rst show that information asymmetry reduces price informativess and can lead to multiple linear equilibria, where price informativeness refers to the amount of private information revealed by price in equilibrium. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information in‡uences price informativeness and equilibrium uniqueness. Speci…cally, public information improves price informativeness only when it is of high quality (precision). When the quality of public information is low, multiple equilibria can arise and increasing public information precision reduces price informativeness.