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Multidimensional Noise and Non-Fundamental Information Diversity

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  • David Russ

Abstract

In this paper, I relax the common assumption of the one-dimensionality of noise made in the standard competitive noisy rational expectations framework. Within an environment characterized by multidimensional noise, I explore the strategic interactions between di erent traders that are informed about di erent components of the noise inherent in the market price. I find that agents' trades against di erent types of noise are complements due to an inference augmentation e ect. As one group trades more aggressively against the part of the noise they observe, the market price becomes a more precise signal for fundamentals for the other noise-informed groups. Since traders use their information about noise together with the market price in order to infer information about fundamentals, this makes the other groups trade more aggressively against their observed piece of noise, too. Strategic complementar- ities can also be found in the information market. Both acquiring information about the same type and about di erent types of noise can be complements.

Suggested Citation

  • David Russ, 2020. "Multidimensional Noise and Non-Fundamental Information Diversity," Working Papers 201, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:201_russ
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    References listed on IDEAS

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    More about this item

    Keywords

    Rational Expectations Equilibrium; Complementarities; Noise Trading; Non-Fundamental Information.;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General

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