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

by Brunnermeier, Markus K.

• ISBN13: 9780198296980
• ISBN10: 0198296983
• Format: Hardcover
• Copyright: 2001-03-29
• Publisher: Oxford University Press

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