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Price reaction and disagreement over public signal

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  • Au, Pak Hung

Abstract

We develop a theory of endogenous disagreement over the interpretation of public news based on the optimal expectation model proposed by Brunnermeier and Parker (2005). In our model, each agent can form an optimal interpretation and agree to disagree with others. We find that endogenous disagreement and trade may arise following public news events. The model predicts that the market price overreacts to uninformative news and underreacts to informative news, thus providing a unified account for the drift in price following significant news events, and the excessive price volatility in response to noisy information.

Suggested Citation

  • Au, Pak Hung, 2016. "Price reaction and disagreement over public signal," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 81-106.
    • Handle: RePEc:eee:jeborg:v:130:y:2016:i:c:p:81-106
    DOI: 10.1016/j.jebo.2016.07.005
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    More about this item

    Keywords

    Endogenous belief formation; Disagreement; Optimal expectations; Market reaction;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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