Skin in the Game and Moral Hazard

What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first‐best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal among regulations inducing zero effort.     

Short-term investment and the informational efficiency of the market

A dynamic finite-horizon market for a risky asset with a continuumof risk-average heterogeneously informed investors and a risk-neutralcompetitive market-making sector is examined. The article analyzesthe effect of investors' horizons on the information contentof prices. It is shown that short horizons enhance or reduceaccumulated price informativeness depending on the temporalpattern of private information arrival. With concentrated arrivalof information, short horizons, reduce final price informativeness;with diffuse arrival of information, short horizons enhanceit. In the process a closed-form solution to the dynamic equilibriumwith long-term investors is derived.     

The Effects of Public Information with Asymmetrically Informed Short‐Horizon Investors

This paper analyzes the effects of public information in a perfect competition trading model populated by asymmetrically informed short‐horizon investors with different levels of private information precision. We first show that information asymmetry reduces the amount of private information revealed by price in equilibrium (i.e., price informativeness) and can lead to multiple linear equilibria. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information influences price informativeness and equilibrium uniqueness. We identify conditions under which public information increases or decreases price informativeness, and when multiple equilibria may arise. Our analysis shows that public information not only directly endows prices with more (public) information, it can also have an important indirect effect on the degree to which prices reveal private information.     

Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.     

The dynamics of international equity market expectations

This paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors. The model predicts that the perceptions of investors in one country about the future market returns in another country are related differently to realized past returns depending on their informational disadvantage relative to other investors: the greater is that informational disadvantage, the greater is the change in perception associated with returns. The predictions are confirmed by monthly survey data of institutional money managers investing in developed markets from 1995 to 2000.     

Accounting information,disclosure, and expected utility: Do investors really abhor uncertainty?

Investors are said to “abhor uncertainty,” but if there were no uncertainty they could earn only the risk‐free rate. A fundamental result in the analytical accounting literature shows that investors buying into a CARA‐normal CAPM market pay lower asset prices, gain higher ex‐ante expected returns, and obtain higher expected utility, when the market payoff has higher variance. New investors obtain similar “welfare” gains from risk under a log/power utility CAPM. These results do not imply that investors “abhor information.” To realize investors' ex‐ante expectations, the subjective probability distributions representing market expectations must be accurate. Greater payoff risk can add to investors' expected utility, but higher ex‐post(realized) utility comes from better information and more accurate ex‐ante expectations. An important implication for accounting is that greater disclosure can have the simultaneous effects of (i) exposing more fully or perceptibly firms' payoff uncertainty, thereby increasing new investors' expected utility, and (ii) improving market estimates of firms' payoff parameters (means, variances, covariances), thereby giving investors a better chance of realizing their expectations. Paradoxically, better information can be valuable to new investors by exposing more fully and more accurately the risk in firms' business operations and results–new investors maximizing expected utility want both more risk and better information.     

The effect of sequential information releases on trading volume and price behaviour

This paper examines a two-period setting in which each trader receives a private signal, possibly different, in each period before he trades. The principal objectives are threefold. First, we describe the risky asset demands and price reactions in a noisy rational expectations equilibrium where the time 1 average private signal is not revealed by the price sequence but the time 2 average private signal is. Secondly, we analyse how informed trading volume is affected by the revealed information and supply shocks when pure noise trading volume is uncorrected with observable market variables. Our result indicates that no trade occurs for informed traders when net supply remains fixed across rounds of trade. And, when supply shocks are random, trading volume is induced by the informed and the noise traders, but noise trading is not predictable. Finally, we investigate these properties in the case when pure noise trading volume is correlated with observable market variables. It is shown that no informed trading takes place when there is no supply shock. However, when net supply contains random shocks, trading volume consists of noise and informed trading, both of which can be estimated.     

Word-of-mouth communication,noise-driven volatility,and public disclosure

This paper examines how a firm adjusts its disclosure quality in response to technological innovations that improve investors' private information. We show that more precise private information can endogenously amplify supply shocks and, hence, increase noise-driven (or non-fundamental) price volatility. We study how the firm reacts to such changes and derive a necessary and sufficient condition under which the firm improves its disclosure quality when investors are informed with better private signals. We then apply our model to study investors' private word-of-mouth communication. Our analysis highlights a “dark side” of word-of-mouth communication and a call for better public disclosure even if private communication is assumed to be unbiased and truthful. We provide empirical predictions regarding how price volatility, market depth, and firms’ disclosure qualities would change as technological innovations, such as social media, facilitate information sharing among investors.     

Discretionary disclosure,efficiency, and signal informativeness

This paper studies a competitive asset market characterized by an adverse selection problem. The analysis focuses on the link between the market participants’ productive activities and discretionary disclosures. While informed parties’ discretion over disclosure allows them to earn private gains, it leads to an inefficient allocation of resources. A more informative signal makes the informed parties better off, but reduces the uninformed parties’ welfare. Nonetheless, it improves the economy's allocative efficiency. The paper also shows that when the signal quality is endogenous, the informed parties over-invest in the signal informativeness relative to the level that maximizes social welfare.     

A Rational Expectations Equilibrium with Informative Trading Volume

A large number of empirical studies find that trading volume contains information about the distribution of future returns. While these studies indicate that observing volume is helpful to an outside observer of the economy it is not clear how investors within the economy can learn from trading volume. In this paper, I show how trading volume helps investors to evaluate the precision of the aggregate information in the price. I construct a model that offers a closed‐form solution of a rational expectations equilibrium where all investors learn from (1) private signals, (2) the market price, and (3) aggregate trading volume.     

Financial Markets Where Traders Neglect the Informational Content of Prices

We model a financial market where some traders of a risky asset do not fully appreciate what prices convey about others' private information. Markets comprising solely such “cursed” traders generate more trade than those comprising solely rationals. Because rationals arbitrage away distortions caused by cursed traders, mixed markets can generate even more trade. Per‐trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others' information from prices, even when they dismiss it as noisier than their own. Making private information public raises rational and “dismissive” volume, but reduces cursed volume given moderate noninformational trading motives.     

Differential informational and dynamic behavior of stock trading volume

This article develops a multiperiod rational expectations modelof stock trading in which investors have differential informationconcerning the underlying value of the stock. Investors tradecompetitively in the stock market based on their private informationand the information revealed by the market-clearing prices,as well as other public news. We examine how trading volumeis related to the information flow in the market and how investors'strading reveals their private information.     

On the limits to speculation in centralized versus decentralized market regimes

Speculation creates an adverse selection cost for utility traders, who will choose not to trade if this cost exceeds the benefits of using the asset market. However, if they do not participate, the market collapses, since private information alone is not sufficient to create a motive for trade. There is, therefore, a limit to the number of speculative transactions that a given market can support. This paper compares this limit in decentralized, monopoly-intermediated and competitively-intermediated market regimes, finding that the second regime is best equipped to deal with speculation: an informed monopolist can price-discriminate investors and thus always avoid market breakdowns. These regimes are also compared in terms of welfare and trading volume. The analysis suggests a reason for the presence of intermediaries in financial markets.     

基于异质信号的资产价格学习机制及均衡演化路径

本文从金融市场指令交易机制出发,将市场投资主体分为市场追随者和自我相信者两类,分析了两类投资者面对由异质分析资产价值信号形成的市场价格的学习机制,且对交易量变化以及均衡价格的达成路径进行了研究。研究表明,单期价格均衡下市场仍存在资产交易,且投资者随着均衡价格期数增加和价格精度增大逐渐撤离市场,较大的市场追随者比重将滞后混合策略市场的价格均衡期数。     

Information Leakage and Market Efficiency

This article analyzes the effects of information leakage ontrading behavior and market efficiency. A trader who receivesa noisy signal about a forthcoming public announcement can exploitit twice. First, when he receives it, and second, after thepublic announcement since he knows best the extent to whichhis information is already reflected in the pre-announcementprice. Given his information he expects the price to overshootand intends to partially revert his trade. While informationleakage makes the price process more informative in the short-run,it reduces its informativeness in the long-run. The analysissupports Securities and Exchange Commission's Regulation FairDisclosure.     

投资者理性预期、流动性约束与股价崩盘传染研究

“传染性”是股价崩盘三大基本特征之一,会加剧股价崩盘负面影响,甚至引发系统性金融风险,因此,本文重点关注股价崩盘传染机制研究。首先,本文基于两阶段理性预期均衡模型,提出股价崩盘传染两大假设,即投资者理性预期与流动性约束导致传染;其次,基于2000-2016年全球28个国家或地区资本市场数据,实证检验股价崩盘传染机制和传染渠道。研究显示:(1)投资者理性预期、流动性约束会导致股价崩盘发生传染;(2)股价崩盘事件会在资本市场关联国家或地区传染;(3)提高资本市场信息透明度、加强金融管制有助于降低受关联国家或地区股价崩盘传染。     

PRIVATE INFORMATION ACQUISITION IN EXPERIMENTAL MARKETS PRONE TO BUBBLE AND CRASH

This paper reports the results of twelve experimental markets designed to investigate whether a costly private information system decreases the propensity of price bubbles to form. A private information system is hypothesized to decrease traders' subjective uncertainty about the behavior of other traders by reinforcing common expectations for all traders. Results show that private information does not eliminate price bubbles, but asset prices converge toward the rational expectations predictions with trader experience. The price of private information is related to the expected gains derived from asset trading.     

异质预期、群体演化与资产价格波动机制

信息和心理偏差的非完全同质性导致投资者形成异质的主观预期,因而市场中的投资者可细分为持有不同主观预期的群体。当原群体成员主观预期发生调整时,该群体成员可能就会转移到与其新预期相似的群体中,或者与其他投资者组成一个新的群体,从而引发群体间规模的此消彼长或新预期类型群体的产生,最终实现群体间的演化。据此,文章提出"个体—群体—群体"的演化路径,系统阐述了资产价格波动的形成机制:现实市场中的群体演化必然引起不同资金流的合并或分化,从而导致市场资金流分布格局发生演变,进而推动资产价格波动。这一结论从社会互动这一独特视角进一步揭示了资产价格波动及资产价格泡沫形成机制。     

On Speculation, Index Futures Markets, and the Link Between Market Volatility and Investor Welfare

This paper develops a trading model that incorporates informed speculators as well as investors who possess incorrect expectations about asset values. It is shown that the introduction of an index futures market, by stimulating additional misinformed speculation, increases market liquidity and adversely affects price variability and efficiency in the underlying stock markets. An analysis of the welfare of uninformed hedgers suggests that the relationship between uninformed investor welfare and two key parameters that dominate policy discussions, market liquidity and price variability, is quite tenuous.     

Do market prices reveal the decision models of sophisticated investors?: Evidence from the laboratory

If security prices are fully revealing, then all public information should be reflected in prices, and unsophisticated traders may be able to learn how various types of information affect security valuation by observing prices. A series of laboratory asset markets was conducted to examine whether unsophisticated traders are able to learn to evaluate publicly released information by trading with and observing trades made by a sophisticated trader who knows the valuation implications of the information. We find that unsophisticated traders who participate in an asset market with a sophisticated trader show significant improvement in their ability to use public information on a subsequent price estimation task. Conversely, a control group consisting only of unsophisticated traders shows no improvement. We conclude that market prices convey the sophisticated trader’s private information in a manner that permits unsophisticated investors to learn the stock price implications of a public information release.