imperfect information and cross autocorrelation among stock prices i develop a model to explain why stock returns are positively cross autocorrelated when market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks which contain marketwide information the pricing error of one stock is correlated with the other signals as market makers adjust prices after observing true values or previous price changes of other stocks stock returns become positively crossautocorrelated if the signal quality differs among stocks the cross autocorrelation pattern is asymmetric i show that both own and cross autocorrelations are higher when market movements are larger

discount rate changes stock market returns volatility and trading volume evidence from intraday data and implications for market efficiency we examine the eaect of discount rate changes on stock market returns volatility and trading volume using intraday data equity returns generally respond negatively and significantly to the unexpected announcements however the eaect of expected changes on equity returns is insignificant furthermore our results indicate that equity prices respond to announcements within the trading period hour after the information release an indication of a return reversal is too small to cover the full transaction costs unexpected discount rate changes also contribute to higher market volatility although the volatility is short lived similarly unexpected changes in discount rates induce larger trading volume while expected changes do not abnormal trading volume occurs only in period t our results also support the notion that unexpected changes in the discount rates impact market returns irrespective of the federal reserve operating procedures 1999 elsevier science b v all rights reserved

security analysis and trading patterns when some investors receive information before others in existing models of information acquisition all informed investors receive their information at the same time this article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others the model implies that under some conditions investors will focus only on a subset of securities herding while neglecting other securities with identical exogenous characteristics in addition the model is consistent with empirical correlations that are suggestive of oft cited trading strategies such as profit taking short term position reversal and following the leader mimicking earlier trades in existing models of information acquisition all informed investors receive their information at the same time while these models provide many important insights in reality some investors either fortuitously or owing to superior skill acquire pertinent information before others by being first an investor can exploit this information to great advantage information that is uncovered only slightly later is less valuable even if it has not yet been publicly revealed we show in this article that the sequential nature of information arrival has a significant effect on both the trading decisions and the types of information collected by investors the model we develop describes the investment choices of a set of competitive risk averse investors who investigate the long term prospects of firms lucky or high ability investors uncover the

optimal portfolio policies with borrowing and shortsale constraints abstract we characterize optimal intertemporal portfolio policies for investors with crra utility facing either a borrowing constraint or shortsale restrictions or both the optimal constrained portfolios are identified as optimal unconstrained portfolios for a higher riskless rate or for a subset of the risky assets or for a combination of the two settings our characterization is based on duality results in cvitanic and karatzas 1992 annals of applied probability 2 767 818 for optimal portfolio investment when portfolio values are more generally constrained to a closed convex nonempty subset of r n

aggregate fluctuations as an information transmission mechanism a model is presented in which individuals attempt to track shocks with a capital like quantity that is costly to produce and to adjust the shocks have separate individual specific and economy wide components individuals do not have direct access to desired information about economy wide shocks the information is potentially available from the observation of endogenous aggregates but because the aggregates are endogenous there is an informational externality associated with them two polar cases are considered when the desired information is about economy wide real shocks as in townsend 1983 the externality is potentially completely internalized when the desired information is about purely nominal aggregates as in lucas 1973 1975 aggregate fluctuations are a necessary condition of equilibrium

imperfect competition in a multi security market with risk neutrality the central purpose of this paper is to develop a model of insider trading i e trading based on private information in the context of an imperfectly competitive multi security market with risk neutral agents imperfect competition allows us to consider strategic behavior and a multi security market lets us study the effect of a correlated environment on equilibrium we employ the informational assumption that market makers can observe all order flows and so portfolio diversification arises in this model for strategic reasons given correlated fundamentals market makers can potentially learn about every security from each order flow this causes even a risk neutral trader who does not face short selling restrictions to refrain from determining the demand for each security independently this contrasts with traditional multi asset models which focus on the incentive to reduce portfolio variance or the effect of short selling restrictions or budget constraints under imperfect competition correlation has two effects one ceteris paribus it allows the uninformed to learn from additional variables since each order flow could potentially have information about all payoffs on the other hand it creates an incentive for informed traders to restrict what others can learn from public information thus our analysis can be viewed as an application to the multi security heterogeneous information model in admati 1985 of the imperfectly competitive equilibrium concept which kyle 1985 first applied to the single security homogeneous information model of grossman and stiglitz 1980 our principal results include an explicit characterization of a linear equilibrium as a function of three general covariance matrices associated with payoffs noise trading and errors in private signals under general covariance structures we show that there always exists an equilibrium in which the relationship between the vector of prices and the vector of order flows is governed by a symmetric positive definite matrix the plan of the paper is as follows in section 2 we introduce our model we derive the equilibrium in section 3 and section 4 comments on the properties of the equilibrium the proofs of the results are in the appendix

side effects of campaign finance reform because campaign finance reform is usually motivated by the concern that existing legislation cannot effectively prevent campaign contributions to buy favors this article assumes that contributions influence political decisions but given that it is also widely recognized that interest groups achieve influence by providing political decision makers with policy relevant information we also assume that lobbies engage in non negligible informational lobbying we focus on a single political decision to be taken and offer a simple model in which the optimal influence strategy is a mixture of both lobbying instruments our main result is to show that campaign finance reform may have important side effects it may deter informational lobbying so that less policy relevant information is available and as a result political decisions become less efficient jel c72 d72

information expected utility and portfolio choice we study the consumption investment problem of an agent with a constant relative risk aversion preference function who possesses noisy information about the future prospects of a stock we also solve for the value of information to the agent in closed form we find that information can significantly alter consumption and asset allocation decisions for reasonable parameter ranges information increases consumption in the vicinity of 25 information can shift the portfolio weight on a stock from 0 to around 70 thus de pending on the stock beta the weight on the market portfolio can be considerably reduced with information causing the appearance of underdiversification the model indicates that stock holdings of informed agents are positively related to wealth unrelated to systematic risk and negatively related to idiosyncratic uncertainty we also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion

insider trading without normality in this paper we analyse the existence and uniqueness of equilibrium in a particular class of monopolistic rational expectations models we show the equivalence between the kyle 1985 model of insider trading where the insider observes the amount of noise trading and the kyle 1989 model of informed speculation when there is one risk neutral insider and many risk neutral market makers we show that in these two equivalent models i there exists a unique equilibrium independently of the distribution of uncertainty ii this equilibrium minimizes the expected gains of the informed agent under incentive compatibility constraints we extend our results to a class of signalling games

lobbying and welfare in a representative democracy this paper studies the impact of lobbying on political competition and policy outcomes in a framework which integrates the citizen candidate model of representative democracy with the menu auction model of lobbying positive and normative issues are analysed on the positive side lobbying need have little or no effect on policy outcomes because voters can restrict the influence of lobbyists by supporting candidates with offsetting policy preferences on the normative side coordination failure among lobbyists can result in pareto inefficient policy choices in addition by creating rents to holding office lobbying can lead to excessive entry into electoral competition

information diversity and complementarities in trading and information acquisition we analyze a model in which different traders are informed of different fundamentals that affect the security value we identify a source for strategic complementarities in trading and information acquisition aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental encouraging more trading and information acquisition on that fundamental this tends to amplify the effect of exogenous changes in the underlying information environment due to complementarities greater diversity of information in the economy improves price informativeness we discuss the relation between our model and recent financial phenomena and derive testable empirical implications

portfolio choice attention allocation and price comovement abstract this paper models the attention allocation of portfolio investors investors choose the composition of their information subject to an information flow constraint given their expected investment strategy in the next period which is to hold a diversified portfolio in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal when investors use this private signal to update information about two assets changes in one asset affect both asset prices and may lead to asset price comovement the model also has implications for the transmission of volatility shocks between two assets

on aggregation of information in competitive markets the dynamic case abstract this article examines in the spirit of hellwig 1980 how a dynamic competitive security market aggregates and communicates information between various market participants at every instant it employs a continuous time economy consisting of a large number of heterogeneous agents who are endowed with noisy private signals about the risky asset payoff of differing precision it yields a stationary rational expectations equilibrium in which at every instant the agents use information contained in the market prices without rendering their private information redundant it shows that the market price reflects only that part of private information which is common to many signals and thus extends hellwig s single period results to a multi period model

short term investment and equilibrium multiplicity abstract i study the effects of the heterogeneity of traders horizons in a 2 period nree model where all traders are risk averse owing to risk premia short termism generates multiple equilibria in particular two distinct patterns arise along the low trading intensity equilibrium short termists anticipate a thinner second period market and owing to risk aversion scale back their trades this reduces both risk sharing and information impounding into prices enforcing a high returns volatility low price informativeness equilibrium along the high trading intensity equilibrium the opposite happens and a low volatility high price informativeness equilibrium arises thus in the presence of short term behavior and traders risk aversion periods of high volatility are a signal of poor price informativeness

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

equilibrium factor pricing with heterogeneous beliefs this paper develops an equilibrium factor pricing theory when investors have heterogene ous beliefs about asset payoffs generated by the ross linear factor model investors receive private information about the unknown parameters of the payoff process they use this private information and equilibrium prices to predict asset payoffs the paper de velops a closed form price function for a noisy rational expectations equilibrium and relates it to the general solution even though we allow for a large number of investors diversity of beliefs and parameter uncertainty both persist in equilibrium we show that investors beliefs about expected payoffs are approximately linear in the asset s betas thus establishing the apt as investors prefer to hold high information assets in equilib rium the relative weight of these assets in the apt pricing bound is higher the reverse is true for low information assets

are more risk averse agents more optimistic insights from a rational expectations model we analyze the link between pessimism and risk aversion we consider a model of partially revealing competitive rational expectations equilibrium with diverse information in which the distribution of risk aversion across individuals is unknown we show that when a high individual level of risk aversion is taken as a signal for a high average level of risk aversion more risk averse agents are more optimistic this correlation between individual risk aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk risk sharing schemes and welfare implications are analyzed we show that agents welfare may increase upon the receipt of more precise information

public and private information about short and long lived assets using an overlapping generations model this paper considers the impact of an improvement in the technology that investors use to obtain signals about future payouts of a risk asset it is shown that the effects of such a change on the predictability of the gross return on the asset and on the welfare of the agents depend on whether the asset will make multiple future payouts is long lived or a single future payout is short lived and whether the signals about the payoffs are public or private copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on timing and selectivity the dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement this paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity in defining these notions we attempt to capture their intuitive interpretation we offer two basic modeling approaches which we term the portfolio approach and the factor approach we show how the quality of timing and selectivity information can be identified statistically in a number of simple models and discuss some of the econometric issues associated with these models in particular a simple quadratic regression is shown to be valid in measuring timing information

a comparison of stock market mechanisms i analyze a multi asset market under two trading mechanisms in the first the unrestricted system traders demand for each asset depends on all equilibrium prices and prices reflect the information contained in all order flows in the second the restricted system traders demand depends on the traded asset price and prices reflect single order flow information i show that informed traders use of multidimensional private information depends on the number of prices they observe and on the price formation process i then give conditions rendering the restricted system more efficient than the unrestricted system

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

rational panics and stock market crashes abstract this paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders we show that uninformed traders can precipitate a price crash because as prices decline they surmise that informed traders received negative information which leads them to reduce their demand for assets and drive the price of stocks even lower the model yields several implications such as that crashes can occur even when the fundamentals are strong and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

complementarities multiplicity and supply information if traders can obtain private information about the payoff and the supply of a stock then there can exist i complementarity in information acquisition and ii multiple equilibria in the financial and information markets the additional dimension of supply information increases coordination possibilities in the financial market leading to multiple equilibria the existence of two information sources can lead to information acquisition being complementary the multiplicity of equilibria is suggestive of excess volatility and crashes the different financial market equilibria imply differing patterns of cost of capital and volume of trade 2009 by the european economic association

environmental protection a theory of direct and indirect competition for political influence how is it that environmental groups can have a strong impact on environmental policy but without much lobbying this paper develops a model of direct lobbying the government and indirect persuading the public competition for political influence and finds that they are complementary however an increase in the effectiveness of public persuasion or a rise of public environmental awareness induces substitution between the two the findings establish that the empirical phenomenon of lack of political contribution from environmental groups may not be related to financial constraints but to their greater effectiveness in public persuasion and growing public environmental awareness the size of its economic stake and hence the associated lobbying effort and the efficiency of its organization in exerting political influence how then can we explain why some environmental groups have been very successful against polluting industries when the latter s economic stakes seem very high and they lobby more and their interests are more efficiently organized some might suggest that the reason for the success of the environmental movement is that environmental groups have large memberships and can provide block votes 2 however according to olson 1965 a large membership of an interest group is not necessarily an advantage and it is still uncertain whether environmental groups are able to mobilize their members to cast votes based on such affiliations this paper suggests an alternative explanation by developing a theory of direct and indirect competition between special interests for political influence rather than marshalling block votes a primary feature of our framework is that two opposing interest groups an environmentalist group and an industrialist group compete directly and indirectly for political influence in a three stage game the indirect competition takes place in the first stage in which interest groups exert effort in persuading the public to indirectly influence government policy the direct competition takes place in the second stage in which interest groups exert effort in

ideological conviction and persuasion in the rent seeking society abstract the paper develops a model of rent seeking in a democratic political context where voting as well as rent seeking matters in this context the paper demonstrates that voter ideology is a constraint on the rent seeking game as well as a possible avenue of rent seeking in a setting where there are both rent seeking and ideological interest groups rent seekers can free ride on the efforts of ideologues which tends to reduce rent seeking effort in a setting where complementary economic and ideological interest groups coordinate their efforts both rent seeking and ideological conflict tend to increase

speculation and the bond market an empirical no arbitrage framework an affine no arbitrage asset pricing framework is developed that allows for agents to have rational but heterogeneous expectations the framework can match both bond yields and the observed dispers

modelling price pressure in financial markets abstract we present experimental evidence that unlike traditional assumptions in economic theory security prices do not respond to pressure from their own excess demand instead prices respond to excess demand of all securities despite the absence of a direct link between markets we propose a model of price pressure that explains these findings in our model agents set order prices that reflect the marginal valuation of desired future holdings called aspiration levels in the short run as agents encounter difficulties executing their orders they scale back their aspiration levels marginal valuations order prices and hence transaction prices change correspondingly the resulting price adjustment process coincides with the global newton method the assumptions of the model as well as its empirical implications are fully borne out by the data our model thus provides an economic foundation for why markets appear to search for equilibrium according to newton s procedure

asset pricing in large information networks we study asset pricing in economies with large information networks we focus on networks that are sparse and have power law degree distributions in line with empirical studies of large scale social networks our theoretical framework yields a rich set of novel asset pricing implications we derive closed form expressions for price volatility profitability and trading volume as functions of the network topology we also study agent welfare and show that the network that optimizes total welfare is typically a uniform one with an intermediate degree of connectedness

mass media and special interest groups abstract media revenues are an important determinant of media behavior it is generally accepted that news coverage depends not only on the preferences of media consumers but also on the preferences of advertisers or subsidizing groups however existing models reach the opposite conclusions about the relationship between the profitability of advertising and media bias we present a theoretical model that reconciles these results the model shows that the sign of the effect of marginal costs of production or marginal advertising revenues on the level of distortion in news coverage depends on complementarity or substitutability between media bias and audience size for an interest group the existence of a budget constraint for an interest group and media outlets reliance on subscription in addition to advertising revenues

the puzzling evolution of the home bias information processing and financial openness abstract this paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage after financial liberalization local investors have a magnified informational advantage since information processed under autarky remains useful after liberalization a gradual shift towards foreign assets occurs as the relevance of autarkic information declines over time in the long run home bias remains large due to the interaction between information and portfolio choices empirical evidence supports the main predictions of our model namely that bias increases with information capacity and decreases with financial openness

the feasibility of an index contingent trading mechanism auction or call trading systems are used in many stock exchanges an essential problem in the application of these systems is that orders in one security cannot be conditioned on prices of other securities this paper proposes and analyzes the feasibility of an index contingent trading system in this system limit orders may be conditioned on an index any weighted average of the security prices that is determined simultaneously with the prices in addition to the asset price without any assumptions about traders behavior it is shown that under a reasonable restriction on the structure of the limit orders there is a unique solution vector of prices to any set of orders in all securities moreover the paper presents a quick and simple algorithm that converges to the solution this algorithm is based on an extension of the current mechanisms therefore it can be implemented easily in any computerized auction system

a trading mechanism contingent on several indices we introduce a trading mechanism where the execution of an order on a security can be made contingent on the relation between the clearing price of the security and the clearing price of one or several indices a mechanism similar to ours but limited to only one index was implemented on the tel aviv stock exchange we argue that it is in some cases crucial to make the execution of an order contingent on several indices our mechanism consists of a particular implementation of a double sided multi unit combinatorial auction with substitutes or dmcs auction which we introduced in an earlier article

every little helps esg news and stock market reaction stories about corporate social responsibility have become very frequent over the past decade and managers can no longer ignore their impact on firm value in this paper we investigate the extent and the determinants of the stock market s reaction following ordinary news related to environmental social and governance issues the so called esg factors to that purpose we use an original database provided by covalence ethicalquote our empirical analysis is based on about 33 000 esg news positive or negative targeting one hundred listed companies over the period 2002 2010 on average firms facing negative events experience a drop in their market value of 0 1 whereas companies gain nothing on average from positive announcements we find also that market participants are responsive to the media but they do not react to firms press releases or to ngos disclosures moreover our results indicate that sector s reputation mitigates the loss the goodwill hypothesis and that cultural proximity and lexical contents of esg disclosures play a significant role in the magnitude of the impact

option listing and stock returns abstract this article examines the effect of option introductions on the underlying stocks in addition to the price increase and volatility decrease that take place when new options are listed we obtain and explain the following new empirical results i an increase in the value of the market around the listing dates of new options ii an increase in the value of an industry index which excludes the optioned stocks iii the dissipation of the price and volatility effects in recent periods and iv the existence of an announcement effect in one subperiod of our sample and its dissipation in recent periods

can transport infrastructure change regions economic fortunes some evidence from europe and china abstractcan transport infrastructure change regions economic fortunes some evidence from europe and china regional studies claims and counterclaims about the likely impact of new transport infrastructure on a region s economic performance have existed for centuries going back to the early days of canals and railways high speed rail hsr as a new type of infrastructure has just over 50 years of existence the persistent debate is questioning the power of hsr in reducing economic disparities between cities and effecting economic transformation the paper goes beyond macro modelling looking to more disaggregated approaches of the structural changes two regions one in europe and one in china are compared to gain insights for future research and practice

a general equilibrium model of congressional voting in this paper we specify a model in which congressmen constituents and campaign contributors simultaneously decide on behavior constituents and contributors desire to influence the voting behavior of congressmen congressmen on the other hand want to be elected and vote accordingly we empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model our results indicate that part of the voting behavior of congressmen may be explained by noneconomic factors we also find that unions and businesses as campaign contributors are sometimes influential unions are more often influential than is business ideological factors are also important in explaining voting

the effect of derivative assets on information acquisition and price behavior in a rational expectations equilibrium this article shows that introducing derivative assets increases incentives to collect information about asset payoffs the increase in information collection makes the price of the underlying asset more informative and causes the expected price to increase extending the model to a dynamic setting with multiple risky assets we find the introducing derivative assets for one asset increases the expected prices of positively correlated assets and reduces price reaction to future earnings announcements these findings are consistent with the bulk of the empirical evidence on the relationship between the introduction of derivative assets and the behavior of asset prices article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

competitive rational expectations equilibria without apology abstract consider a financial market with n risk averse asymmetrically informed traders when n grows at the same rate as noise trading prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1 n equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk bearing capacity both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1 n the results extend to endogenous information acquisition and the connections with the grossman stiglitz paradox are highlighted

information and diversity of analyst opinion this paper examines problems in the use of divergence of analyst opinion as a proxy for estimation risk in empirical studies of security returns and asset pricing models we demonstrate that diversity of opinion can increase even though the amount of private information increases and we show that diversity of opinion may overstate estimation risk if the capital market aggregates the information held by investors we produce empirical results consistent with our conclusions specifically we find that divergence of opinion can produce measures of estimation risk that are inconsistent with a received proxy for estimation risk and with observed common stock returns

equilibrium price formation and the value of private information an economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset and then choose demand functions that determine the allocation of assets it is a well known paradox that if agents are price takers and prices are fully revealing then an equilibrium with costly information acquisition does not exist it is shown that if the price formation process is modeled explicitly and agnets are not price takers then it is possible to have an equilibrium with fully revealing prices and costly information acquisition article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mass media and public policy abstract if more informed voters receive favorable policies then mass media should influence policy because it provides most of the information people use in voting this paper uses a simple model to analyze the effect of mass media provision of news on a number of policy issues redistribution the size of the government sector rents and corruption the effectiveness of lobby groups and political business cycles it is easy to deal with such a wide range of issues because existing models of political competition often include informed and uniformed voters modelling mass media simply endogenizes who is informed and who is not the paper also discusses empirical evidence and point to areas for future research

the politics of persuasion when voters are rational a democratic society is considered where the voters but not the politicians are uncertain about how the economy works the parties therefore have a strategic motive to misinform the voters will the voters learn how the economy works and will the policy decisions be efficient it turns out that the degree of polarization of the political parties is crucial if the parties are very polarized voters will not trust the parties and the policy will not reflect how the economy actually works whereas the opposite is true if the parties are less polarized

survey of social and economic growth in se europe a new conceptual frame for sustainability metrics the practice so far has indicated that there is a sensitive relationship that exists between social and economic subsystem of sustainable development therefore this research suggests comparison of the states of these two subsystems as a new conceptual frame which is essential for strategic conceptualization of development the research pointed out a rather visible collision between the achieved degree of economic and social development in the countries of south eastern europe in respect to germany and france which were taken into consideration as two of the most developed countries in the european union and in the entire world the indicators which are given in this research point to the necessity of further scientific and practical consideration of strategic conceptualization of relationship between economics and society

measuring investment performance in a rational expectations equilibrium model much research has been concerned with evaluating the performance of managed portfolios e g mutual funds and examining whether portfolio managers display in some sense superior performance superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios in general a fund s asset holdings or portfolio weights might not be observable to an outsider whether they are or not however they are likely to change over time this happens especially when better performance is a result of superior information since managers will change their portfolio composition on obtaining private information since such changes must be taken into account the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets groups of assets or generally portfolios with constant and known composition

rent seeking aspects of political advertising political contests have all the usual characteristics of rent seeking games characterized in the recent volume edited by buchanan tollison and tullock 1980 that is to say resources are committed to a distributive contest where the social pie is not necessarily enlarged but rather divided up a policy enacted via a winner take all apportioning since political advertising is one method of influencing electoral outcomes we might expect competitive political advertising to exhibit rent seeking losses of the usual sort the extent of the rent seeking losses associated with political advertising depends upon the extent to which advertising affects voter perceptions of the relative merits of electoral alternatives political proponents may well completely dissipate any electoral rents at stake through their advertising efforts yet still increase social welfare if political advertisments provide sufficiently valuable information to the electorate on the other hand if advertising has no effect on voter perceptions or provides information of dubious value then rent dissipating advertising may generate substantial rent seeking losses

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

diversification in parametric rational expectations economies abstract it is shown that in large parametric rational expectations models even when investors receive private signals about different subsets of assets all investors hold diversified portfolios

keynesian beauty contest accounting disclosure and market efficiency this paper examines the market efficiency consequences of accounting disclosure in the context of stock markets as a keynesian beauty contest an influential metaphor originally proposed by keynes 1936 and recently formalized by allen morris and shin 2006 in such markets public information plays an additional commonality role biasing stock prices away from the consensus fundamental value toward public information despite this bias i demonstrate that provisions of public information always drive stock prices closer to the fundamental value hence as a main source of public information accounting disclosure enhances market efficiency and transparency should not be compromised on grounds of the keynesian beauty contest effect

the political economy of pollution taxes in a small open economy abstract this paper develops a positive theory explaining pollution tax policy outcomes in a small open economy the equilibrium tax rate depends on lobby group membership the relative importance of lobbying activities and the tax elasticity of pollution the equilibrium properties are investigated the model is extended to incorporate pollution abatement and a pollution abatement subsidy we show that total pollution may be increasing in the pollution abatement subsidy rate this effect arises because the equilibrium pollution tax rate may be decreasing in the subsidy rate due to altered political influence of the lobby groups in the political equilibrium

a jump model for fads in asset prices under asymmetric information abstract this paper addresses how asymmetric information fads and levy jumps in the price of an asset affect the optimal portfolio strategies and maximum expected utilities of two distinct classes of rational investors in a financial market we obtain the investors optimal portfolios and maximum expected logarithmic utilities and show that the optimal portfolio of each investor is more or less than its merton optimal our approximation results suggest that jumps reduce the excess asymptotic utility of the informed investor relative to that of uninformed investor and hence jump risk could be helpful for market efficiency as an indirect reducer of information asymmetry our study also suggests that investors should pay more attention to the overall variance of the asset pricing process when jumps exist in fads models moreover if there are very little or too much fads then the informed investor has no utility advantage in the long run

special interests and the media theory and an application to climate change a journalist reports to a voter on an unknown policy relevant state competing special interests can make claims that contradict the facts but seem credible to the voter a reputational incentive to avoid taking sides leads the journalist to report special interests claims to the voter in equilibrium the voter can remain uninformed even when the journalist is perfectly informed communication is improved if the journalist discloses her partisan leanings the model provides an account of persistent public ignorance on climate change that is consistent with narrative and quantitative evidence

mass media competition political competition and public policy if better informed voters receive favourable policies then mass media will affect policy because mass media provide most of the information people use in voting this paper models the incentives of the media to deliver news to different groups the increasing returns to scale technology and advertising financing of media firms induce them to provide more news to large groups such as taxpayers and dispersed consumer interests and groups that are valuable to advertisers this news bias alters the tradeoff in political competition and therefore introduces a bias in public policy the paper also discusses the effects of broadcast media replacing newspapers as the main information source about politics the model predicts that this change should raise spending on government programmes used by poor and rural voters

a discontinuous mispricing model under asymmetric information we study a discontinuous mispricing model of a risky asset under asymmetric information where jumps in the asset price and mispricing are modelled by levy processes by contracting the filtration of the informed investor we obtain optimal portfolios and maximum expected utilities for the informed and uninformed investors we also discuss their asymptotic properties which can be estimated using the instantaneous centralized moments of return we find that optimal and asymptotic utilities are increased due to jumps in mispricing for the uninformed investor but the informed investor still has excess utility provided there is not too little or too much mispricing

firm characteristics and analyst following abstract this paper examines the major determinants of the number of analysts following a firm a simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm s analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition

political internalization of economic externalities and environmental policy abstract this paper derives the characteristics of endogenous environmental policy in a common agency model of politics and proceeds to show that competition between lobby groups is an important source of internalization of economic externalities our analysis generalizes bhagwati s principle of targeting to the case of distorted political markets moreover we show that the politically optimal structure of environmental taxes incorporates a pigouvian adjustment however since lobby groups care about the distribution of income as well as about efficiency the equilibrium structure of taxes differs considerably from the pigouvian rule

higher order expectations in asset pricing we examine formally keynes idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs we call this the higher order wedge which depends on the difference between higher and first order expectations of future payoffs we analyze the determinants of this wedge and its impact on the equilibrium price in the context of a dynamic noisy rational expectations model we show that the wedge reduces asset price volatility and disconnects the price from the present value of future payoffs the impact of the higher order wedge on the equilibrium price can be quantitatively large

a theory of the dynamics of security returns around market closures numerous empirical studies document patterns in the means and variances of security returns measured over periods that are punctuated by market closures this article develops a multiperiod model in which closures delay the resolution of uncertainty thereby redistributing risk across time and agents since agents are risk averse in the model this redistribution affects the equilibrium price altering risk premia liquidity costs and the degree of informational asymmetry as a consequence closures alter both the means and variances of returns the article demonstrates that closures can generate a variety of mean and variance effects including those that mirror the empirical phenomena numerous empirical studies of security returns have documented patterns in both the mean and the variance of returns interestingly most of these patterns are punctuated by periods in which the market is regularly closed for example the variance of returns from the market close to the market opening is much less than the variance from open to close similarly mean returns over weekends are abnormally low in fact significantly negative relative to daily mean returns during the trading week within a trading day return variances are u shaped with peaks occurring immediately after the market opens and just before it closes 2 further french and roll 1986 examine the variance of tuesday close to thursday close returns during a period in which the market was closed on wednesdays and show that this variance is only slightly greater than half the tuesday close to thursday close variance when the market was open on wednesdays 3 one explanation for the differences in the overnight and trading day variances is that market hours mostly coincide with business hours when

political agency government responsiveness and the role of the media abstract the role of mass media in making governments responsive to the needs of citizens is a relatively neglected area in economics we sketch a theoretical example with a role for media in enhancing government responsiveness based on asymmetric information between citizens and government we then use data for the period 1958 1992 on the extent to which indian state governments responded to food shortages via the public distribution of food correlating these with proxies of media political and economic development we find that states that are more responsive tend to also be those with high levels of newspaper circulation electoral turnout and literacy in contrast richer states do not tend to be more responsive than poorer states

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

disagreement portfolio optimization and excess volatility disagreement a key factor inducing trading has been receiving ever increasing attention in recent years most research has focused on disagreement about the expected returns several authors have shown that if the average belief coincides with the true expected return in the portfolio context prices are unaffected by disagreement in this paper we study the pricing effects of disagreement about return variances we show that i disagreement about variances has systematic and significant pricing effects more disagreement leads to higher prices and ii prices are very sensitive to the degree of disagreement even if the average belief about the variance is constant tiny fluctuations in the disagreement about the variance lead to substantial price fluctuations this second result may offer an explanation for the excess volatility puzzle when small changes in the degree of disagreement occur they induce relatively large price changes yet the changes in disagreement may be hard to directly detect empirically leading to apparent excess volatility

asymmetric information and the lack of portfolio diversification there is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios the present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias the main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities instead of possessing superior information about the aggregate performance of the local stock market the second key assumption is based on the evidence that short selling is a costly activity

information markets and the comovement of asset prices traditional asset pricing models predict that covariance between prices of difierent assets should be lower than what we observe in the data this model generates high covariance within a rational expectations framework by introducing markets for information about asset payofis when information is costly rational investors will not buy information about all assets they will learn about a subset because information production has high flxed costs competitive producers charge more for low demand information than for high demand information a price that declines in quantity makes investors want to purchase a common subset of information if investors price many assets using a common subset of information then a shock to one signal is passed on as a common shock to many asset prices these common shocks to asset prices generate excess covariance the cross sectional and time series properties of asset price covariance are consistent with this explanation

estimating the value of information we derive a general expression for the value of information to a price taking investor in a dynamic environment and provide a framework for its estimation we study the value of both private and public information and break it into its instrumental and psychic parts to illustrate we estimate and rank the values of leading macroeconomic indicators gdp employment etc using variations in option prices we find that consumer investors with conventional preference parameters would pay 3 to 5 bps of their wealth for a one time private peek into these indicators such signals provide substantial instrumental value but a minor psychic value received august 29 2016 editorial decision june 6 2018 by editor itay goldstein authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

environmental and resource economics a canadian retrospective the paper reviews research contributions to environmental and resource economics by scholars in canada we focus mainly on work from the past 25 years but also highlight earlier pathbreaking work we begin by looking at broad trends in research both internationally and within canada we then review canadian contributions to various topics in the field canadians have played a leading role in the development of the field especially in resource economics international environmental economics and the valuation of environmental amenities

accounting income stock price and managerial compensation abstract this paper employs an agency model where a manager has a two dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price price is modeled as an endogenous variable that reflects all available information including earnings two settings are contrasted in the first earnings and price reflect the same underlying information about firm value while in the second earnings reflect a subset of the information reflected in price it is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price

learning from prices and the dispersion in beliefs i study whether investors use an asset s price to update their beliefs about its payos i show that in a dynamic economy the relationship between the dispersion in investor beliefs and returnvolume characteristics can be used to empirically answer this question when investors have rational expectations re and condition on the price i show that belief dispersion is positively related to expected returns return volatility and correlation between volume and absolute returns but negatively related to return autocorrelation when investors do not use the price as in a dierence of opinions do model these relationships are reversed i test these predictions using the crosssection of returns volume and analyst forecast dispersion over dierent horizons the results are consistent with the re model at quarterly and longer horizons but reject both models at the monthly horizon i show that a hybrid model with some do investors and some re investors can match the short horizon evidence the empirical results are consistent with the idea that while some investors do not use the price in the short run they increase their conditioning on the price over time

corporate financial hedging with proprietary information abstract if a firm has information pertinent to its own dividend stream that is not made available to its shareholders it may be in the interests of the firm and its shareholders to adopt a financial hedging policy this is in contrast with the modigliani miller theorem which implies that with informational symmetry such financial hedging is irrelevant in certain cases hedging policies are identified that are unanimously supported by shareholders

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

the political economy of government responsiveness theory and evidence from india the determinants of government responsiveness to its citizens is a key issue in political economy here we develop a model based on the solution of political agency problems having a more informed an politically active electorate strengthens incentives for governments to be responsive this suggests that there is a role both for democratic institutions and the mass media in ensuring that the preferences of citizens are reflected in policy the ideas behind the model are tested on panel data from india we show that public food distribution and calamity relief expenditure are greater controlling for shocks where governments face greater electoral accountability and where newspaper circulation is highest

incomplete markets and volatility abstract this paper shows that the precautionary motive combined with asset incompleteness is a major source of volatility and indeterminacy in financial markets price fluctuations originate from agents efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading risky assets a high interest rate at a future date reduces the potential for future consumption smoothing via borrowing which leads to a strong precautionary motive and a low interest rate in the current period the negative feedback between future and current rates generates fluctuations this logic is developed in spec a cara normal exchange economy with many periods and endogenous interest rates when there is an intermediate level of market incompleteness and sufficient investor impatience fluctuations in the real interest rate can be large even though the aggregate endowment is constant spec has a unique equilibrium under a finite horizon on the other hand with a finite number of infinitely lived agents there exists a robust continuum of equilibria that are neither bubbles nor sunspots journal of economic literature classification numbers c61 d52 d58 g11 g12

the use and effect of political propaganda in democracies this paper examines the influence of political propaganda on voters and analyses the behavior of the interest groups in the face of the influence being exercised by propaganda semi truths are distributed among the electorate the decision taken by a voter results from his basic opinion and from the parts of information he receives the analysis shows that the greater the likelihood of a certain decision being reached by a fully informed electorate the more probable it is that the same decision will be reached by a rationally uninformed electorate the pecuniary interest of an interest group is however also positively correlated with the probability that the electorate reaches a decision which is agreeable to that interest group it has finally become appar ent that the results of the approach concur well with empirical studies

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

financial education and behavioral finance new insights into the role of information in financial decisions recent empirical evidence based on surveys and experimental activities within the fields of behavioral finance and financial education has offered economists new empirically based insights into how individuals use information in making financial decisions specifically the importance of information in financial decisions may be reduced or eliminated by psychological aspects of the individual such as a state of overconfidence that is individual or shared with a group or by the individual s limited ability to process complex and abundant information this paper aims to complement this emerging body of literature by studying how individuals perceive and process information when making financial decisions we review these contributions and suggest a number of broad guidelines that can provide a framework for future discussion of this topic within financial decision theory

information percolation momentum and reversal abstract we propose a joint theory of time series momentum and reversal based on a rational expectations model we show that a necessary condition for momentum to arise in this framework is that information flows at an increasing rate we focus on word of mouth communication as a mechanism that enforces this condition and generates short term momentum and long term reversal investors with heterogeneous trading strategies contrarian and momentum traders coexist in the marketplace although a significant proportion of investors are momentum traders momentum is not completely eliminated word of mouth communication spreads rumors and generates price run ups and reversals our theoretical predictions are in line with empirical findings

information acquisition and learning from prices over the business cycle abstract we study firms incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles our model predicts that for a wide range of parameter values firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief the equilibrium price system which features endogenous information transmission dampens aggregate fluctuations by discouraging information acquisition our welfare analysis reveals that information acquisition in the decentralized economy is not efficient this is due to inefficient employment dispersion arising from information heterogeneity in equilibrium time series data for the u s economy support the model s prediction of wages being more informative about total factor productivity after recessions than following booms

electoral competition with informed and uninformed voters i present a model of electoral competition in which candidates raise campaign contributions by choosing policies that benefit interest groups and then expend those contributions to influence voters who are uninformed about the policies informed voters however vote based on those policies so candidates face a trade off between choosing a policy to generate funds to attract the uninformed vote and choosing a policy to attract the informed vote electoral equilibria are characterized for two categories of policies particularistic and collective in the case of particularistic policies the equilibrium policies of the candidates are separated if the proportion of uninformed voters is sufficiently high and the degree of separation is an increasing function of that proportion the model is extended to include the public financing of elections and incumbency advantages for the case of collective policies the candidates locate at the median of the ideal points of the informed voters and contributions are zero