Inference, arbitrage, and asset price volatility

Arbeitspapier

Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between arbitrage and inference: they would like to buy assets in response to temporary price declines (the arbitrage effect) but sell when prices decline permanently (the inference effect). In equilibrium, the presence of arbitrageurs increases volatility when the inference effect dominates the arbitrage effect. From a technical point of view, this paper offers closed-form solutions to a dynamic equilibrium model with asymmetric information and non-Gaussian priors.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 187

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: asset pricing ; learning ; asymmetric information ; limits to arbitrage ; Börsenkurs ; Volatilität ; Arbitragegeschäft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/60662
• Last update: 10.03.2025, 11:45 AM CET