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Asymmetric information, heterogeneous prior beliefs, and public information
Gong, Fuzhou1; Liu, Hong2,3,4
AbstractWe present a dynamic trading model that assumes traders face not only asymmetric information but also heterogeneous prior beliefs under a mandatory public disclosure requirement. We find that the overconfident insider chooses to trade in an alternating way in the sense that he underreacts to his information in the first period, overreacts in the second, underreacts in the third, overreacts in the fourth, and so on. The irrational insider trades in this way not only to dissimulate his information but also to equalize his profits across periods. The coexistence of public disclosure and heterogeneous prior beliefs leads to large and fluctuant trading volumes, and the more underconfident the insider is, the greater is the degree of fluctuation. Also, contrarian and momentum trading arise en-dogenously as a result of the insider's irrationality and the public disclosure. Finally, we present the economic explanation for our model by giving the Granger causality relationship between the amended price series and the insider's trading order series. (C) 2016 Elsevier Inc. All rights reserved.
KeywordPublic disclosure Insider trading Price discovery Heterogeneous prior beliefs Granger causality
Funding ProjectNational Natural Science Foundation of China[10721101] ; National Natural Science Foundation of China[11201060] ; National Natural Science Foundation of China[11471069] ; National Natural Science Foundation of China[11126107] ; China's National 973 Project[2006CB805900] ; China Scholarship Council[201406625063]
WOS Research AreaBusiness & Economics
WOS SubjectBusiness, Finance ; Economics
WOS IDWOS:000390638200008
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Document Type期刊论文
Corresponding AuthorLiu, Hong
Affiliation1.Chinese Acad Sci, Inst Appl Math, Acad Math & Syst Sci, Beijing 100190, Peoples R China
2.Northeast Normal Univ, MOE Key Lab Appl Stat, Sch Math & Stat, Changchun 130024, Peoples R China
3.Cent Univ Finance & Econ, China Econ & Management Acad, Beijing 100081, Peoples R China
4.Cent Univ Finance & Econ, CIAS, Beijing 100081, Peoples R China
Recommended Citation
GB/T 7714
Gong, Fuzhou,Liu, Hong. Asymmetric information, heterogeneous prior beliefs, and public information[J]. INTERNATIONAL REVIEW OF ECONOMICS & FINANCE,2016,46:100-120.
APA Gong, Fuzhou,&Liu, Hong.(2016).Asymmetric information, heterogeneous prior beliefs, and public information.INTERNATIONAL REVIEW OF ECONOMICS & FINANCE,46,100-120.
MLA Gong, Fuzhou,et al."Asymmetric information, heterogeneous prior beliefs, and public information".INTERNATIONAL REVIEW OF ECONOMICS & FINANCE 46(2016):100-120.
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