taylor rules for the ecb using expectations data we estimate taylor rules for the euro area using consensus economics data for expected inflation and output growth and compare these estimates with more conventional specifications in which actual outcomes are used we find that the ecb takes expected inflation and expected output growth into account in setting interest rates while in the more conventional model specification the coefficient of realized inflation is not significantly different from zero

when transparency improves must prices reflect fundamentals better no in the presence of speculative opportunities investors can learn about both asset fundamentals and the beliefs of other traders we show that this learning exhibits complementarity learning more along one dimension increases the value of learning about the other as a result regulatory changes may be counterproductive first increasing transparency i e making fundamental information cheaper to acquire can make prices less informative when investors respond by learning relatively more about others second public disclosures discourage private learning about fundamentals while encouraging information acquisition about others accordingly disclosing more fundamental information can decrease overall informational efficiency by decreasing price informativeness received april 20 2016 editorial decision september 30 2017 by editor itay goldstein

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

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

speculation and hedging in segmented markets we analyze a model in which traders have different trading opportunities and learn information from prices the difference in trading opportunities implies that different traders may have different trading motives when trading in the same market some trade for speculation and others for hedging and thus they may respond to the same information in opposite directions this implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps our model is relevant to various realistic settings and helps to understand a variety of modern financial markets

the eurosystem the u s federal reserve and the bank of japan similarities and differences the paper provides a systematic comparison of the eurosystem the u s federal reserve and the bank of japan these monetary authorities exhibit somewhat different status and tasks which reflect different historical conditions and national characteristics however widespread changes in central banking practices in the direction of greater independence and increased transparency as well as changes in the economic and financial environment over the past 15 20 years have contributed to reduce the differences among these three world s principal monetary authorities a comparison based on simple over the counter policy reaction functions shows no striking differences in terms of monetary policy implementation

new evidence on the puzzles results from agnostic identification on monetary policy and exchange rates abstract past empirical research on monetary policy in open economies has found evidence of the delayed overshooting puzzle and the forward discount puzzle we revisit the effects of monetary policy on exchange rates by applying uhlig s uhlig h 2005a what are the effects of monetary policy on output results from an agnostic identification procedure journal of monetary economics 52 2 381 419 identification procedure that involves sign restrictions on the impulse responses of selected variables in a first step we leave the response of the exchange rate agnostically open and find sizeable evidence for both puzzles in a second step we additionally rule out the delayed overshooting by construction our results indicate that the forward discount puzzle is robust even without delayed overshooting

historical monetary policy analysis and the taylor rule this study examines the usefulness of the taylor rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the united states monetary policy during the 1920s and since the 1951 treasury federal reserve accord can be broadly interpreted in terms of this framework with rather surprising consistency in broad terms during these periods policy has been generally formulated in a forward looking manner with price stability and economic stability serving as implicit or explicit guides as early as the 1920s measures of real economic activity relative to normal or potential supply appear to have influenced policy analysis and deliberations confidence in such measures as guides for activist monetary policy proved counterproductive at times resulting in excessive activism such as during the great inflation and at the brink of the great depression policy during the past two decades is broadly consistent with natural growth targeting variants of the taylor rule that exhibit less activism

financial markets the real economy and self fulfilling uncertainties we develop a model of informational interdependence between financial markets and the real economy linking economic uncertainty to information production and aggregate economic activities in general equilibrium the mutual learning between financial markets and the real economy creates a strategic complementarity in their information production leading to self fulfilling surges in economic uncertainties in a dynamic setting our model characterizes self fulfilling uncertainty traps with two steady state equilibria and a two stage economic crisis in transitional dynamics

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

factor models and time varying parameter framework for forecasting exchange rates and inflation a survey a survey of models used for forecasting exchange rates and inflation reveals that the factor based and time varying parameter or state space models generate superior forecasts relative to all other models this survey also finds that models based on taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates the evidence on the use of bayesian model averaging approach in forecasting exchange rates reveals limited predictive power but strong support for forecasting inflation overall the evidence overwhelmingly points to the context of the forecasts relevance of the historical data data transformation choice of the benchmark selected time horizons sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation

exchange rate puzzles and distorted beliefs abstract we propose a new explanation for the foreign exchange forward premium and delayed overshooting puzzles we show that both puzzles arise from a systematic distortion in investors beliefs about the interest rate process accordingly the forward premium is always a biased predictor of future depreciation the bias can be so severe as to lead to negative coefficients in the fama regression delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of misperception we document empirically the extent of this distortion using survey data for g 7 countries against the u s and find that it is strong enough to account for these irregularities

taylor rules and the euro this paper uses real time data to analyze whether the variables that normally enter central banks interest ratesetting rules which we call taylor rule fundamentals can provide evidence of out of sample predictability for the united states dollar euro exchange rate from the inception of the euro in 1999 to the end of 2007 the major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression we also present less formal evidence that with real time data the taylor rule provides a better description of ecb than of fed policy during this period while the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the u s and the euro area and to whether or not there is interest rate smoothing the evidence of predictability is stronger for realtime than for revised data about the same with inflation forecasts as with inflation rates and weakens if output gap growth is included in the forecasting regression bad news about inflation and good news about real economic activity both lead to out of sample predictability through forecasted exchange rate appreciation

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

on the possibility of informationally efficient markets this paper presents conditions for a resolution of the grossman stiglitz paradox of informationally efficient markets we display a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved as long as the correlation in traders valuations is not too large the equilibrium is efficient and the problems associated with fully revealing rational expectations equilibria are precluded without resorting necessarily to noise traders the robustness of the results to general information structures is established and the effect of market power is examined in a large market approximation to the competitive economy the model is applied to explain changes in bidding behavior in central bank liquidity auctions in the crisis period jel d82 d84 g14 e59

learning from prices public communication and welfare we study the effect of releasing public information about productivity or monetary shocks using a micro founded macroeconomic model in which agents learn from the distribution of nominal prices while a public release has the direct beneficial effect of providing new information it also has the indirect adverse effect of reducing the informational efficiency of the price system we show that the negative indirect effect can dominate thus the public information release may increase uncertainty about the monetary shock and reduce welfare we find that the optimal communication policy is always to release either all or none of the information

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

asymmetric price movements and borrowing constraints a rational expectations equilibrium model of crises contagion and confusion this study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints consistent with empirical observations the model finds 1 crises can be caused by small shocks to fundamentals 2 market return distributions are asymmetric and 3 correlations among asset returns tend to increase during crashes the model also predicts 1 crises and contagion are likely to occur after small shocks in the intermediate price region 2 the skewness of asset price distributions increases with information asymmetry and borrowing constraints and 3 crises can spread through investor borrowing constraints

illiquidity contagion and liquidity crashes liquidity providers often learn information about an asset from prices of other assets we show that this generates a self reinforcing positive relationship between price informativeness and liquidity this relationship causes liquidity spillovers and is a source of fragility a small drop in the liquidity of one asset can through a feedback loop result in a very large drop in market liquidity and price informativeness a liquidity crash this feedback loop provides a new explanation for comovements in liquidity and liquidity dry ups it also generates multiple equilibria

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

learning and complementarities in speculative attacks we study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision we show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non fundamental volatility into exchange rates and policy decisions we show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market and that transparency may either increase or decrease the effectiveness of learning from the market depending on how it is implemented

the cost of ruling cabinet duration and the median gap model in a recent article paldam and skott 1995 provide atheoretical explanation for an important empirical phenomenonin democratic countries incumbent governments tend to losevotes in this paper i show that paldam and skott stheoretical explanation for this cost of ruling ispotentially much stronger than they recognize specifically when generalized in a straightforward way their modelexplains not only the cost of ruling itself but also a secondwell established empirical fact that the longer an incumbentgovernment has been in power the more votes it loses further this generalization of the model produces twoadditional empirical hypotheses that have not yet been testedin the empirical literature

net foreign assets and the exchange rate redux revived abstract we revisit obstfeld and rogoff s 1995 results on exchange rate dynamics in a two country monetary model with incomplete asset markets stationary net foreign assets and endogenous monetary policy the nominal exchange rate exhibits a unit root under flexible prices it also depends on the stock of real net foreign assets with sticky prices the exchange rate depends on the past gdp differential along with net foreign assets endogenous monetary policy and asset dynamics have consequences for exchange rate overshooting a persistent relative productivity shock results in delayed overshooting under both flexible and sticky prices a persistent relative interest rate shock generates undershooting under flexible prices

information acquisition price informativeness and welfare abstract we consider the market for a risky asset with heterogeneous valuations private information that agents have about their own valuation is reflected in the equilibrium price we study the learning externalities that arise in this setting and in particular their implications for price informativeness and welfare when private signals are noisy so that agents rely more on the information conveyed by prices discouraging information gathering may be pareto improving complementarities in information acquisition can lead to multiple equilibria

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

endogenous public information and welfare in market games this paper performs a welfare analysis of markets with private information in which agents can condition on noisy prices in the rational expectations tradition pricecontingent strategies introduce two externalities in the use of private information a payoff pecuniary externality related to aggregate volatility and a learning externality the impact of the first depends on whether competition is of the strategic substitutes or complements variety and the second induces agents to put too little weight on private information we find that with strategic substitutes and when the learning externality is not very strong agents put too much weight on private information and prices are too informative this will happen in the normal case where the allocational role of price prevails over its informational role under strategic complementarity there is always under reliance on private information the welfare loss at the market solution may be increasing in the precision of private information the analysis provides insights into optimal business cycle policy and a rationale for a tobin like tax for speculators in financial markets

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

dynamic information acquisition and time varying uncertainty abstract this paper studies the role of information acquisition in propagating stabilizing uncertainty shocks in a dynamic financial market in a static world uncertainty raises the value of information which encourages more information acquisition in a dynamic world however uncertainty can depress information acquisition through a dynamic complementarity channel more uncertainty induces future investors to trade more cautiously this renders future resale stock price less informative and reduces the value of information today due to the dynamic complementarity transitory uncertainty shocks can have long lasting impacts direct government purchases can stimulate information production eliminate equilibrium multiplicity and attenuate the impacts of uncertainty shocks by raising the effective risk bearing capacity of the informed investors

taylor rules and the deutschmark dollar real exchange rate we explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate the interest rate rule in conjunction with some standard assumptions implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials the weights are functions of the parameters of the interest rate rule an initial look at german data yields some support for the model

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

taylor rules with real time data a tale of two countries and one exchange rate abstract using real time data that reflects information available to monetary authorities at the time they are formulating policy we find that estimated taylor rules based on revised and real time data differ more for germany than for the u s taylor rules using real time data suggest differences between u s and german monetary policies and taylor rules for the u s using inflation forecasts are nearly identical to those using lagged inflation rates evidence of out of sample predictability for the dollar mark nominal exchange rate with forecasts based on taylor rule fundamentals is only found with real time data and does not increase if inflation forecasts are used

trading frenzies and their impact on real investment we study a model in which a capital provider learns from the price of a firm s security in deciding how much capital to provide for new investment this feedback effect from the financial market to the investment decision gives rise to trading frenzies in which speculators all wish to trade like others generating large pressure on prices coordination among speculators is sometimes desirable for price informativeness and investment efficiency but speculators incentives push in the opposite direction so that they coordinate exactly when it is undesirable we analyze the effect of various market parameters on the likelihood of trading frenzies to arise

price dispersion private uncertainty and endogenous nominal rigidities this article shows that when agents learn from prices large private uncertainty may result from a small amount of heterogeneity as in a phelps lucas island model final producers look at the prices of their local inputs to infer aggregate conditions however market linkages between islands make the informativeness of local prices endogenous to general equilibrium relations in this context i show that a vanishingly small heterogeneity in local conditions is enough to generate an equilibrium in which prices are rigid to aggregate shocks and transmit only partial information i use this insight as a microfoundation for price rigidity in an otherwise frictionless monetary model and show that even a tiny amount of dispersion in fundamentals can lead to large non neutrality of money

forecasting exchange rates out of sample with panel methods and real time data abstract this paper evaluates out of sample exchange rate forecasting with purchasing power parity ppp and taylor rule fundamentals for 9 oecd countries vis a vis the u s dollar over the period from 1973 q1 to 2009 q1 at short and long horizons in contrast with previous work which reports forecasts using revised data i construct a quarterly real time dataset that incorporates only the information available to market participants when the forecasts were made using bootstrapped out of sample test statistics the exchange rate model with taylor rule fundamentals performs better at the one quarter horizon and panel estimation is not able to improve its performance the ppp model however forecasts better at the 16 quarter horizon and its performance increases in panel framework the results are in accord with previous research on ppp and taylor rule models

information tradeoffs in dynamic financial markets abstract in dynamic financial markets the stochastic supply of risky assets has a significant informational role contrary to static models where it acts as noise in dynamic markets stochastic supply contains information about risk premiums acquiring private dividend information helps investors disentangle dividend information from discount rate information contained in prices for uninformed investors however as more informed investors enter the economy prices become more informative about dividends but less informative about discount rates this tradeoff creates complementarities in information acquisition and multiple equilibria in the information market

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

information acquisition in financial markets tions agents have exponential utility and random variables are normally distributed these assumptions are often necessary to obtain closed form solutions we present an example with alternative assumptions and demonstrate that some of the conclusions from previous literature fail to hold in particular we show that in our example as more agents acquire information prices do not necessarily become more informative and agents may have greater incentive to acquire informatioln learning can therefore be a strategic complement allowing for the possibility of multiple equilibria

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

exchange rate determination under interest rate rules we propose a theory of exchange rate determination under interest rate rules in a two country model we first show that simple interest rate feedback rules can determine a unique and stable equilibrium without any explicit reaction to the nominal exchange rate we characterize how the behavior of the exchange rate and of the terms of trade depends in a critical way on the monetary regime chosen though not necessarily on monetary shocks we give a simple account of exchange rate volatility in terms of monetary policy rules we provide an explanation of the relation between nominal exchange rate volatility and macroeconomic variability in terms of the monetary regime adopted by monetary authorities

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

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

financial prices and information acquisition in large cournot markets abstract in the context of a large cournot market with dispersedly informed firms we show that while output decisions are strategic substitutes private information acquisition decisions can be strategic complements the reversal of incentives operates through the informational role played by the price of a financial asset whose payoff depends on firms output decisions our results rely on a novel mechanism whereby holding fixed the private information of financial traders when firms become more privately informed the financial asset price becomes less informative

out of sample exchange rate predictability with taylor rule fundamentals abstract an extensive literature that studied the performance of empirical exchange rate models following meese and rogoff s meese r a rogoff k 1983a empirical exchange rate models of the seventies do they fit out of sample journal of international economics 14 3 24 seminal paper has not convincingly found evidence of out of sample exchange rate predictability this paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate taylor rule fundamentals we find evidence of short term predictability for 11 out of 12 currencies vis a vis the u s dollar over the post bretton woods float with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing the evidence of predictability is much stronger with taylor rule models than with conventional interest rate purchasing power parity or monetary models

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

informed trading investment and welfare this article studies the welfare economics of informed stock market trading we analyze the effect of more informative prices on investment given that this dependence will itself be reflected in equilibrium prices while a higher incidence of informed speculation always increases firm value through a more informative trading process the effect on agents welfare depends on how revelation of information changes risk sharing opportunities in the market greater revelation of information that agents wish to insure against reduces their hedging opportunities on the other hand early revelation of information that is uncorrelated with hedging needs allows agents to construct better hedges