Asset Pricing under Asymmetric Information
Bubbles, Crashes, Technical Analysis, and Herding
Brunnermeier, Markus K.,
Assistant Professor, Department of Economics,
Princeton University
Print publication date: 2001
Published to Oxford Scholarship Online: November 2003 Print ISBN-13: 978-0-19-829698-0 doi:10.1093/0198296983.001.0001 |
|
|
Abstract:
Asset prices are driven by public news and information that is dispersed among many market participants. Traditional asset pricing theories have assumed that all investors hold symmetric information. Research in the past two decades has shown that the inclusion of asymmetric information drastically alters traditional results. This book provides a detailed up-to-date survey that serves as a map for students and other researchers navigating through this literature.The book starts by introducing the reader to different knowledge, equilibrium, and efficiency concepts. After explaining no-trade theorems, it highlights the important role of asymmetric information in explaining the existence and anatomy of bubbles. The subsequent overview of market microstructure models shows how information is reflected in prices and how traders can infer it from prices. Insights derived from herding models are used to provide explanations for stock market crashes. If investors have short horizons, price correcting arbitrage activity is limited and investors have a tendency to focus on the same (possible unimportant) news, a phenomena that led Keynes to compare the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.In summary, models with asymmetric information provide a better understanding of bubbles, crashes, and other market inefficiencies and frictions.
Keywords: asset prices, asymmetric information, bank runs, bubbles, crashes, financial crises, herding, knowledge, market microstructure, no-trade theorems Table of Contents
Preface
1.
Information, Equilibrium, and Efficiency Concepts
2.
No-Trade Theorems, Competitive Asset Pricing, and Bubbles
3.
Classification of Market Microstructure Models
4.
Dynamic Trading Models, Technical Analysis, and the Role of Trading Volume
5.
Herding and Informational Cascades
6.
Herding in Finance, Stock Market Crashes, Frenzies, and Bank Runs
Bibliography
Index
|
|
|
|
|