Multiple Levels of Participation and Learning in Financial Markets

In a standard asset price model with rational expectations and short-term shocks, long-term shocks affect the distribution of agents’ risk-aversions. Price uncertainty and learning about the distribution are simultaneously determined in an equilibrium. For some parameters, there may be multiple equilibria. In one of them demand is low, there is little revelation of information and uncertainty is high; in another equilibrium, demand and information are at a high level and there is less uncertainty (which stimulates the demand). Introduction Most studies on information in financial markets focus on the information about the intrinsic value of an asset. In these models an asset pays a random variable θ and agents who may be risk-averse, have partial information on θ through private signals, say with the form s = θ+ where is a noise (which may have a normal distribution). The equilibrium price conveys a signal on the aggregate of private signals and therefore on θ. This equilibrium price depends on the agents’ demands which depend on the price and the private signal. The issue is how the market price conveys information on the fundamental θ. The evaluation of the fundamental through the market is certainly essential. However, this part of my research agenda will focus on uncertainty on the characteristics of the agents who demand financial assets, how a financial market may convey information on theses agents and how uncertainty on the demand affects equilibrium properties. The unprecedented rise of the stock market has stimulated many minds. Many interpretations focus as usual on the properties of the future returns of the real investments which support the financial assets, and on whether a “epocal” real change has taken place in the economy. The determinants of the demand for assets (e.g., wealth, risk-aversion) receive less attraction. This paper focuses on the uncertainty and the learning about the demand for an asset through its market price. Previous studies on learning about the fundamental value of an asset have emphasized how equilibrium prices disseminate the private informations on the fundamental value of an asset. Typically, agents have an idiosyncratic signal on the value of this asset, say, si = θ + i for agent i and a true valuation θ, where i are independent noise terms. By observing equilibrium prices, agents are able to obtain some information on the signals of others. This is perhaps due to the widespread assumption of perfect markets with risk-neutral agents under which individual wealth and risk-aversion play no role. For an empirical investigation of the role of demand on asset valuation see Poterba (1998).