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Title:Dynamic trading and asset prices : Keynes vs. Hayek PDF Logo
Authors:Cespa, Giovanni
Vives, Xavier
Issue Date:2009
Series/Report no.:CESifo working paper 2839
Abstract:We investigate the dynamics of prices, information and expectations in a competitive, noisy, dynamic asset pricing equilibrium model. We show that prices are farther away from (closer to) fundamentals compared with average expectations if and only if traders over- (under-) rely on public information with respect to optimal statistical weights. Both phenomena, in turn, occur whenever traders speculate on short-run price movements. For a given, positive level of residual payoff uncertainty, over-reliance on public information obtains if noise trade displays low persistence. This defines a Keynesian” region; the complementary region is Hayekian” in that prices are systematically closer to fundamentals than average expectations. The standard case of no residual uncertainty and noise trading following a random walk is on the frontier of the two regions and identifies the set of deep parameters for which traders abide by Keynes' dictum of concentrating on an asset long term prospects and those only.” The analysis explains accommodation and trend chasing strategies as well as momentum and reversal.
Subjects:efficient market hypothesis
long and short-term trading
average expectations
higher order beliefs
over-reliance on public information
opaqueness
momentum
reversal
JEL:G10
G12
G14
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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