Dynamic trading and asset prices : Keynes vs. Hayek

Arbeitspapier

We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model. We show that prices are farther away from (closer to) fundamentals compared with average expectations if and only if traders over- (under-) rely on public information with respect to optimal statistical weights. Both phenomena, in turn, occur whenever traders speculate on short-run price movements. For a given, positive level of residual payoff uncertainty, over-reliance on public information obtains if noise trade displays low persistence. This defines a Keynesian” region; the complementary region is Hayekian” in that prices are systematically closer to fundamentals than average expectations. The standard case of no residual uncertainty and noise trading following a random walk is on the frontier of the two regions and identifies the set of deep parameters for which traders abide by Keynes' dictum of concentrating on an asset long term prospects and those only.” The analysis explains accommodation and trend chasing strategies as well as momentum and reversal.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2839

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: efficient market hypothesis ; long and short-term trading ; average expectations ; higher order beliefs ; over-reliance on public information ; opaqueness ; momentum ; reversal ; Börsenkurs ; Kapitalmarkttheorie ; Effizienzmarktthese ; Noise Trading ; Wertpapierhandel ; Informationsverhalten ; Erwartungstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cespa, Giovanni ; Vives, Xavier
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/30693
• Last update: 10.03.2025, 11:44 AM CET