Asymmetric information and survival in financial markets

Abstract

In the evolutionary setting for a financial market developed by Blume and Easley (1992), we consider an infinitely repeated version of a model á la Grossman and Stiglitz (1980) with asymmetrically informed traders. Informed traders observe the realisation of a payoff relevant signal before making their portfolio decisions. Uninformed traders do not have direct access to this kind of information, but can partially infer it from market prices. As a counterpart for their privileged information, informed traders pay a per period cost. As a result, information acquisition triggers a trade-off in our setting. We prove that, so long as information is costly, uninformed traders survive. Copyright Springer-Verlag Berlin/Heidelberg 2005Asymmetric information, Evolution, Portfolio rules.,

The Limits of Noise Trading: An Experimental Analysis

“…Friedman [1953] first argued that wealth dynamics would ultimately drive noise traders from markets, and a large literature has expanded on this idea (see DeLong, Shleifer, Summers, and Waldman (DSSW) [1991]; Blume and Easley [1992;; Shefrin and Statman [1994]; Sciubba [1999]; Sandroni [2000]). DSSW offer the counter view that the greater risk taken on by noise traders could permit survival given a positive risk-return trade-off.…”

Market Selection With Differential Financial Constraints

“…Eichhorn et al conclude that "one plausible explanation for why investors constrain certain asset classes may arise because of differences in their relative confidence in the precision of the inputs." Sciubba (2005) studies survival in economies à la Grossman and Stiglitz (1980) and demonstrates that when information acquisition has small but strictly positive cost, uninformed traders can survive, implying that prices do not fully reveal all the available information even in the limit. Nevertheless, we note that a straightforward corollary to Theorem 5 in Blume and Easley (2006) is that an agent who uses Bayesian updating to learn the correct probabilities will vanish in the presence of agents with finer partitions and correct beliefs.…”

“…Another possibility suggested by an anonymous referee is for the investor to try to infer the other agents' distributions from prices. Sciubba (2005) studies survival in economies à la Grossman and Stiglitz (1980) and demonstrates that when information acquisition has small but strictly positive cost, uninformed traders can survive, implying that prices do not fully reveal all the available information even in the limit. 17 Simsek (2013) points out that when traders have heterogeneous beliefs, the benefits of financial innovation in terms of risk sharing might be offset by the increased portfolio risk resulting from speculative trades.…”

Market selection with endogenous information revelation

“…Let be type j agent’s posterior belief about state s in period t . Individual asset demands will be assumed to be consistent with logarithmic utility, as in Mailath and Sandroni (2003) and Sciubba (2005). As observed by Blume and Easley (1992), Sciubba (2005) and others, it is optimal for an investor to expend wealth on asset s equal to his or her belief of that state occurring.…”

“…Denote by α j s t ∈ [0, 1] the fraction of type j agent's wealth that he or she invests in asset s that pays off at time t. Let p j s t ∈ [0, 1] be type j agent's posterior belief about state s in period t. Individual asset demands will be assumed to be consistent with logarithmic utility, as in Mailath and Sandroni (2003) and Sciubba (2005). As observed by Blume and Easley (1992), Sciubba (2005) and others, it is optimal for an investor to expend wealth on asset s equal to his or her belief of that state occurring. That is, α j s t = p j s t for every t. Noise traders' demand is modeled as the demand of investors with logarithmic preferences, but with noisy beliefs.…”