Information Aggregation and Fat Tails in Financial Markets
نویسنده
چکیده
This paper demonstrates that fat-tailed distributions of trading volume and stock price emerge in a model of information aggregation. I consider a simultaneous-move model of traders who infer other traders’ private information on the value of assets by observing aggregate actions. Without parametric assumptions on the private information, I show that the traders’ aggregate actions follow a power-law distribution with exponential truncation. By combining the power law with the composition uncertainty that a market maker faces, the model is able to mimic the non-normal distribution of the stock returns.
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de Travail du Centre d ’ Economie de la Sorbonne Market Efficiencies and Market Risks Pierre - André MAUGIS 2010
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