Insider trading and market manipulations--existence and uniqueness of equilibrium

"Latest revision: May 1991."Includes bibliographical references (p. 28-29).by J.-C. Rochet and J.-L. Vila

Overconfidence and market efficiency with heterogeneous agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders’ expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.Partially revealing equilibria, overconfidence, rational expectations, information

Overconfidence and Market Efficiency with Heterogeneous Agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrele- vance result: when a positive fraction of rational agents (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a conse- quence the overconfidence bias does not affect informational efficiency, price volatility, ra- tional traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price informativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overcon- fident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.partially revealing equilibria, overconfidence, rational expectations, information acquisition, price informativeness.

Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Bloc for Multilateral Liberalization?

Increasingly, in regional agreements, large economies, e.g. U.S. and E.U., offer lower trade barriers in exchange for cooperation by small economies in environmental, intellectual property and other issues. What is the effect of such agreements on multilateral trade liberalization? We show that, even in the absence of trade creation or diversion, such preferential agreements increase the cost of multilateral tariff reductions for the goods exported from small to large countries. This occurs because multilateral tariff reductions decrease the threat that large countries can use in preferential agreements causing a loss in their bargaining power. The result is due to current exceptions in the WTO to the most-favorite-nation rule which allow for lower than MFN tariffs, e.g. art. XXIV and GSP. By explicitly modeling the interaction between preferential and multilateral negotiations we analyze the effects on multilateral tariffs and welfare of strengthening the MFN rule and show that large and small countries may not prefer the same regime of rules.Multilateral trade negotiations; most-favorite-nation; regional integration; cross-border externalities; environment; labor standards; bargaining; repeated games.

Markovian Nash equilibrium in financial markets with asymmetric information and related forward-backward systems

This paper develops a new methodology for studying continuous-time Nash equilibrium in a financial market with asymmetrically informed agents. This approach allows us to lift the restriction of risk neutrality imposed on market makers by the current literature. It turns out that, when the market makers are risk averse, the optimal strategies of the agents are solutions of a forward-backward system of partial and stochastic differential equations. In particular, the price set by the market makers solves a nonstandard "quadratic" backward stochastic differential equation. The main result of the paper is the existence of a Markovian solution to this forward-backward system on an arbitrary time interval, which is obtained via a fixed-point argument on the space of absolutely continuous distribution functions. Moreover, the equilibrium obtained in this paper is able to explain several stylized facts which are not captured by the current asymmetric information models.Comment: Published at http://dx.doi.org/10.1214/15-AAP1138 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

On the Correlation Structure of Microstructure Noise in Theory and Practice

We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed crosscorrelation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.Realized volatility, Market microstructure theory, High-frequency data, Financial econometrics

Security Design with Investor Private Information

I study the security design problem of a firm when investors rather than managers have private information about the firm. I find that it is often optimal to issue information-sensitive securities like equity. The "folklore proposition of debt" from traditional signalling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets can be optimal when competition is high.Security design; Capital Structure; Auctions; Asset backed securities

Comparative statics under uncertainty : single crossing properties and log-supermodularity

July, 199

Does leverage affect asset returns? Theory and evidence

Mestrado em Economia Monetária e FinanceiraO estouro da bolha imobiliária nos EUA que culminou na crise financeira de 2008-09 reacendeu o interesse no estudo das vulnerabilidades que resultam de elevados níveis de alavancagem financeira. Para estudar a relação entre a alavancagem e os preços dos ativos, esta dissertação apresenta um modelo que replica uma economia com dois períodos, dois ativos diferentes, sendo um mais arriscado que o outro, onde dois estados da natureza podem ocorrer. As crenças heterogéneas dos agentes que pertencem a esta economia resultam em diferentes expectativas acerca do retorno esperado do ativo com risco. Esta heterogeneidade dita que apenas os agentes mais otimistas participam do mercado de ativos de risco. Assim, quando o crédito é introduzido nesta economia essa taxa de participação diminui em função do aumento do preço do ativo com risco. Do modelo apresentado retira-se que a taxa de retorno do ativo com risco depende positivamente do índice de alavancagem do agente (ou rácio Financiamento-Garantia). Esta dissertação realiza ainda uma análise de regressão multivariada, através de dados trimestrais do mercado de habitação que constam na base de dados do BCE, e descobre que a taxa de retorno da habitação na área euro reage negativamente ao aumento da alavancagem financeira das famílias observado no trimestre em análise, mas tem uma reação positiva e mais forte ao nível de alavancagem observado no trimestre anterior. Estes resultados sugerem que a taxa de retorno do mercado imobiliário pode demorar a responder a alterações nos requisitos dos financiamentos hipotecários.The housing bubble burst following the emergence of leverage-fuelled property booms observed in the US culminated in the financial crisis of 2008-09 did regain the interest on the vulnerabilities that result from higher levels of leverage. To capture the relation between leverage and its influence on asset bubbles, this paper presents a model to replicate an economy with two periods, two different assets, with one riskier than the other, where two states of nature can occur. The heterogeneous beliefs of agents belonging to this economy result in different assignments on the expected return of the risky asset which in turn dictates that only the more optimistic agents participate in the risky asset market. When agents have access to credit to purchase the risky asset, this participation rate diminishes as a result of the increasing price of the risky asset. One can also derive from this model that the rate of return of the risky asset depends positively on the agent?s leverage ratio (or Loan-to-Value ratio). By using quarterly housing data from the European Central Bank Data Warehouse, this paper does a multivariate regression analysis to find the housing return rate in the Euro area reacts negatively to increasing households? leverage observed in the current quarter, but has a higher positive reaction from the leverage level observed in the previous quarter. The results suggest the rate of return of the housing market may show some delay to reply to looser margin requirements.info:eu-repo/semantics/publishedVersio