Liquidity and Asset Prices in Rational Expectations Equilibrium with Ambiguous Information
نویسنده
چکیده
The quality of information in financial asset markets is often hard to estimate. This paper analyzes information transmission in asset markets when agents treat information of unknown quality as ambiguous. We study the effects of information ambiguity on asset prices, trading volume, and market liquidity in noisy rational expectations equilibrium. We consider a market with risk-averse informed investors, risk-neutral competitive arbitrageurs, and noisy supply of the risky asset, first studied in Vives (1995a,b) with unambiguous information. Ambiguity increases sensitivity of asset prices to information signals and to changes in asset supply. Further, it may make markets less liquid. Preliminary Draft. 1
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