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Price-conveyed Information versus Observed Insider Behavior: A Note on Rational Expectations Convergence

Banks, Jeffrey S. (1985) Price-conveyed Information versus Observed Insider Behavior: A Note on Rational Expectations Convergence. Journal of Political Economy, 93 (4). pp. 807-815. ISSN 0022-3808. http://resolver.caltech.edu/CaltechAUTHORS:20160524-112911877

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Abstract

In a recent paper on behavior in experimental securities markets, Plott and Sunder ( 1982) concluded that the rational expectations (RE) model was superior to the traditional prior information (Pl) model in predicting equilibrium prices and holdings. In particular, given a market with one commodity, three possible states of the world, and three groups of trader "types," each with differing valuations on the commodity per state, initially uninformed traders were able to infer the underlying state from the current market price and act accordingly. In a related paper, Friedman, Harrison, and Salmon (1984) observed that, given the existence of a futures market, the RE model outperformed the PI model in multiperiod, single-commodity markets as well. One source of potential misinterpretation, however, comes from the fact that, although one-half of the traders of each type were informed of the true state at the beginning of each period in Plott and Sunder (1982) and one-third of the traders of each type in Friedman, Harrison, and Salmon (1984), the same traders were informed in almost every period. In a more recent paper, Plott and Sunder (1983) constructed markets where all traders received partial information (i.e., given possible states X, Y, and Z, a trader's private information would be either "not X" or "not Y" if the state were Z), yet the combinations of traders receiving a certain message in any period were determined randomly.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://dx.doi.org/10.1086/261333DOIArticle
http://www.journals.uchicago.edu/doi/10.1086/261333PublisherArticle
http://www.jstor.org/stable/1832140JSTORArticle
Additional Information:© 1985 The University of Chicago Press. I would like to thank Charles Plott, Daniel Friedman, and an anonymous referee for helpful suggestions and criticisms. The financial support of NSF grant no. SES-8310461 is gratefully acknowledged. 1 The lone exception is experiment 5, market year 5, in Friedman, Harrison, and Salmon.
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Funding AgencyGrant Number
NSFSES-8310461
Record Number:CaltechAUTHORS:20160524-112911877
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20160524-112911877
Official Citation:Price-conveyed Information versus Observed Insider Behavior: A Note on Rational Expectations Convergence Jeffrey S. Banks Journal of Political Economy Vol. 93, No. 4 (Aug., 1985), pp. 807-815
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:67308
Collection:CaltechAUTHORS
Deposited By: Ruth Sustaita
Deposited On:24 May 2016 20:46
Last Modified:24 May 2016 20:46

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