Asset Pricing Under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding

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Oxford University Press, 2001 - Business & Economics - 244 pages
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Asset prices are driven by public news and information that is often dispersed among many market participants. These agents try to infer each other's information by analyzing price processes. In the past two decades, theoretical research in financial economics has significantly advanced ourunderstanding of the informational aspects of price processes. This book provides a detailed and up-to-date survey of this important body of literature.The book begins by demonstrating how to model asymmetric information and higher-order knowledge. It then contrasts competitive and strategic equilibrium concepts under asymmetric information. It also illustrates the dependence of information efficiency and allocative efficiency on the securitystructure and the linkage between both efficiency concepts. No-Trade theorems and market breakdowns due to asymmetric information are then explained, and the existence of bubbles under symmetric and asymmetric information is investigated.The remainder of the survey is devoted to contrasting different market microstructure models that demonstrate how asymmetric information affects asset prices and traders' information , which provide a theoretical explanation for technical analysis and illustrate why some investors "chase the trend."The reader is then introduced to herding models and informational cascades, which can arise in a setting where agents' decision-making is sequential. The insights derived from herding models are used to provide rational explanations for stock market crashes. Models in which all traders are inducedto search for the same piece of information are then presented to provide a deeper insight into Keynes' comparison of the stock market with a beauty contest. The book concludes with a brief summary of bank runs and their connection to financial crises.
 

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This is a good book for an advanced course in Financial Economics (PhD Level). It is heavy on abstract mathematical constructs in set theory and optimization on convex spaces.
That said, if that is
what you want, Brunnermeier is one of the top researchers in this field and the book is well -written and concise. I consider this a must for any researcher in asset pricing and/or market microstructure. 

Contents

Information Equilibrium and Efficiency Concepts
1
NoTrade Theorems Competitive Asset Pricing Bubbles
30
Classification of Market Microstructure Models
60
Dynamic Trading Models Technical Analysis
98
Herding and Informational Cascades
147
and Strategic Delay
153
Herding in Finance Stock Market Crashes Frenzies
165
References
221
Index 233
231
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About the author (2001)


Markus K. Brunnermeier is an Assistant Professor in the Department of Economics at Princeton University, where he teaches courses in financial economics. He was previously a member of the Financial Markets Group at the London School of Economics.

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