The Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories*
Peter Bossaerts, Cary Frydman, John Ledyard
Review of Finance | OXFORD UNIV PRESS | Published : 2014
Two theoretical literatures, one using Bayesian Nash equilibrium (BNE), and the other using noisy rational expectations equilibrium (NREE), both provide a foundation for understanding how private information is impounded into asset prices, yet some of their predictions are conflicting. Here, we compare for the first time, the two theories using data from carefully controlled laboratory asset markets. In the dynamics, we find strong evidence for BNE theory, although final prices support predictions of the NREE theory. Finally, we document that price volatility increases when information is being impounded in prices. © 2013 The Authors 2013.