Listening to the noise in financial markets

Arbeitspapier

Do all types of information benefit the efficiency of prices in the sense that they drive them closer to fundamentals compared to the situation where information does not exist? Looking at the competitive noisy rational expectations framework, the clear answer of the literature is: yes. It suggests that rational traders use all available types of information to submit more sophisticated market orders, thereby boosting price efficiency. In this paper, however, we propose a contradiction to this traditional view. We show that there exist types of non-fundamental information that are detrimental to price efficiency, as they lead traders to rationally trade with rather than against noise. We develop an analytically tractable framework with public non-fundamental information and prove that this type of information can harm price efficiency, i.e., prices would be closer to fundamentals if public non-fundamental information did not exist.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BGPE Discussion Paper ; No. 203

Classification and Topics

• Classification: Wirtschaft ; Existence and Stability Conditions of Equilibrium ; General Equilibrium and Disequilibrium: Financial Markets ; Asset Pricing; Trading Volume; Bond Interest Rates ; Behavioral Finance: General‡
• Subject: Rational Expectations Equilibrium ; Market Efficiency ; Non-Fundamental Information ; Destabilizing Rational Speculation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Arnold, Lutz ; Russ, David
• Event: Veröffentlichung
• (who): Friedrich-Alexander-Universität Erlangen-Nürnberg
• (where): Erlangen und Nürnberg
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/237994
• Last update: 10.03.2025, 11:44 AM CET