Journal Article

The More We Know about the Fundamental, the Less We Agree on the Price

Péter Kondor

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 3, pages 1175-1207
Published in print July 2012 | ISSN: 0034-6527
Published online January 2012 | e-ISSN: 1467-937X | DOI:
The More We Know about the Fundamental, the Less We Agree on the Price

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  • Information, Knowledge, and Uncertainy
  • Economics


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I allow trading horizon heterogeneity across groups in a standard differential information model of a financial market. This approach can explain the well-established phenomenon that, after a public announcement, trading volume increases, more private information is incorporated into prices and volatility increases. In such environments, public information has the important secondary role of helping agents learn about the information of other agents. Therefore, whenever the correlation between the private information of different groups is sufficiently low, a public announcement increases disagreement among short-horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.

Keywords: Higher-order expectations; Noisy rational expectations model; Trading volume; Public information; D82; D84; G12; G14

Journal Article.  12655 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Economics

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