Lecture 8 Flashcards
What is the weak form efficiency semi-strong efficiency strong efficiency
Pretty repetitive question I know.. Future prices cannot be predicted by analyzing prices from the past. Excess returns can not be earned in the long run by using investment strategies based on historical share prices or other historical data Prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information Prices reflect all information, public and private, and no one can earn excess returns
Can there be an a competitive equilibrium with complete markets when there exist agent i and j who are differentially informed?
Since markets are complete, a competitive equilibrium must assign a price to each state contingent claim Furthermore, since the information set for i and j is different there exist a state w to which i assigns positive probabilitiy and j assigns zero probability If the state contingent price for state w is positive, agent j will short an infinite amount of the state w-contingent claim If the state contingent price for state w is non-positive agent i will purchase an infinite amount of the state-w contingent claim Hence, no equilibrium
Why is there no equilibrium in a complete markets when there exist agent i and j who are differentially informed?
Because agents do not learn from observing prices
What role does a price system need to have to ensure an equilibrium in a complete markets when there exist agent i and j who are differentially informed?
1) Determining an individual’s budget constraint, as in a competitive equilibrium 2) Conveying Information
How is an equilibrium called in which the price system plays the role of … 1) Determining an individual’s budget constraint, as in a competitive equilibrium 2) Conveying Information
Rational expectation equilibrium In such an event, the price system is said to be fully revealing
What is the relationship between a Rational expectation equilibrium and a competitive equilibrium
Observationally, there is no distinction between a REE and a competitive equilibrium in a corresponding artificial economy in which agents have symmetric information held in REE
What is projection theorem
Apply this on that example
What is the projection theorem to the variance
Kyle Model:
What should the price be with
\theta - Insider’s market order
\lambda - Amount of Insider Trader
x - Uninformed Market Order
p = \lambda * (\theta + x)
