Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237994 
Year of Publication: 
2020
Series/Report no.: 
BGPE Discussion Paper No. 203
Publisher: 
Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen und Nürnberg
Abstract: 
Do all types of information benefit the efficiency of prices in the sense that they drive them closer to fundamentals compared to the situation where information does not exist? Looking at the competitive noisy rational expectations framework, the clear answer of the literature is: yes. It suggests that rational traders use all available types of information to submit more sophisticated market orders, thereby boosting price efficiency. In this paper, however, we propose a contradiction to this traditional view. We show that there exist types of non-fundamental information that are detrimental to price efficiency, as they lead traders to rationally trade with rather than against noise. We develop an analytically tractable framework with public non-fundamental information and prove that this type of information can harm price efficiency, i.e., prices would be closer to fundamentals if public non-fundamental information did not exist.
Subjects: 
Rational Expectations Equilibrium
Market Efficiency
Non-Fundamental Information
Destabilizing Rational Speculation
JEL: 
C62
D53
G12
G40
Document Type: 
Working Paper

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