Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60662
Authors: 
Adrian, Tobias
Year of Publication: 
2004
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 187
Abstract: 
Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between arbitrage and inference: they would like to buy assets in response to temporary price declines (the arbitrage effect) but sell when prices decline permanently (the inference effect). In equilibrium, the presence of arbitrageurs increases volatility when the inference effect dominates the arbitrage effect. From a technical point of view, this paper offers closed-form solutions to a dynamic equilibrium model with asymmetric information and non-Gaussian priors.
Subjects: 
asset pricing
learning
asymmetric information
limits to arbitrage
JEL: 
G10
G12
G14
Document Type: 
Working Paper

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