9780198296980

Asset Pricing under Asymmetric Information Bubbles, Crashes, Technical Analysis, and Herding

by
  • ISBN13:

    9780198296980

  • ISBN10:

    0198296983

  • Format: Hardcover
  • Copyright: 2001-03-29
  • Publisher: Oxford University Press

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Summary

Asset prices are driven by public news and information that is often dispersed among many market participants. These agents try to infer each other's information by analyzing price processes. In the past two decades, theoretical research in financial economics has significantly advanced ourunderstanding of the informational aspects of price processes. This book provides a detailed and up-to-date survey of this important body of literature.The book begins by demonstrating how to model asymmetric information and higher-order knowledge. It then contrasts competitive and strategic equilibrium concepts under asymmetric information. It also illustrates the dependence of information efficiency and allocative efficiency on the securitystructure and the linkage between both efficiency concepts. No-Trade theorems and market breakdowns due to asymmetric information are then explained, and the existence of bubbles under symmetric and asymmetric information is investigated.The remainder of the survey is devoted to contrasting different market microstructure models that demonstrate how asymmetric information affects asset prices and traders' information , which provide a theoretical explanation for technical analysis and illustrate why some investors "chase the trend."The reader is then introduced to herding models and informational cascades, which can arise in a setting where agents' decision-making is sequential. The insights derived from herding models are used to provide rational explanations for stock market crashes. Models in which all traders are inducedto search for the same piece of information are then presented to provide a deeper insight into Keynes' comparison of the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.

Author Biography


Markus K. Brunnermeier is an Assistant Professor in the Department of Economics at Princeton University, where he teaches courses in financial economics. He was previously a member of the Financial Markets Group at the London School of Economics.

Table of Contents

List of figures
ix
Preface xi
Information, Equilibrium, and Efficiency Concepts
1(29)
Modeling Information
2(12)
Rational Expectations Equilibrium and Bayesian Nash Equilibrium
14(7)
Rational Expectations Equilibrium
14(2)
Bayesian Nash Equilibrium
16(5)
Allocative and Informational Efficiency
21(9)
No-Trade Theorems, Competitive Asset Pricing, Bubbles
30(30)
No-Trade Theorems
30(7)
Competitive Asset Prices and Market Completeness
37(10)
Static Two-Period Models
38(6)
Dynamic Models-Complete Equitization versus Dynamic Completeness
44(3)
Bubbles
47(13)
Growth Bubbles under Symmetric Information
48(7)
Information Bubbles
55(5)
Classification of Market Microstructure Models
60(38)
Simultaneous Demand Schedule Models
65(14)
Competitive REE
65(7)
Strategic Share Auctions
72(7)
Sequential Move Models
79(19)
Screening Models a la Glosten
79(8)
Sequential Trade Models a la Glosten and Milgrom
87(6)
Kyle-Models and Signaling Models
93(5)
Dynamic Trading Models, Technical Analysis, and the Role of Trading Volume
98(49)
Technical Analysis - Inferring Information from Past Prices
99(14)
Technical Analysis - Evaluating New Information
100(3)
Technical Analysis about Fundamental Value
103(10)
Serial Correlation Induced by Learning and the Infinite Regress Problem
113(4)
Competitive Multiperiod Models
117(13)
Inferring Information from Trading Volume in a Competitive Market Order Model
130(6)
Strategic Multiperiod Market Order Models with a Market Maker
136(11)
Herding and Informational Cascades
147(18)
Herding due to Payoff Externalities
147(1)
Herding due to Information Externalities
148(9)
Exogenous Sequencing
149(4)
Endogenous Sequencing, Real Options, and Strategic Delay
153(4)
Reputational Herding and Anti-herding in Reputational Principal-Agent Models
157(8)
Exogenous Sequencing
158(5)
Endogenous Sequencing
163(2)
Herding in Finance, Stock Market Crashes, Frenzies, and Bank Runs
165(56)
Stock Market Crashes
166(24)
Crashes in Competitive REE Models
168(9)
Crashes in Sequential Trade Models
177(7)
Crashes and Frenzies in Auctions and War of Attrition Games
184(6)
Keynes' Beauty Contest, Investigative Herding, and Limits of Arbitrage
190(21)
Unwinding due to Short Horizons
192(6)
Unwinding due to Risk Aversion in Incomplete Markets Settings
198(6)
Unwinding due to Principal-Agent Problems
204(7)
Firms' Short-Termism
211(2)
Bank Runs and Financial Crisis
213(8)
References 221(12)
Index 233

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