Asset pricing under heterogeneus expectations
Sartono, R. Agus (Adv.: Prof. Dr. Klaus Schredelseker), Prof. Dr. Klaus Schredelseker
This research models trading behavior, price behavior and examines the impact of heterogeneous expectations on asset prices. First, we extend Kyle's (1985) one¬period model to two-period models. The model shows that the informed trader takes into account not only the private information but also the pricing function. The price is an increasing function of the volatility of the asset value and decreasing in' the volatility of uninformed traders' demand. The costly information acquisition has an impact on the optimum demand but it has no direct impact on the price.
Next, we simplify Admati and Pfleiderer's (1988) model to find out the impact of heterogeneous expectations on the asset price. We assume there are two informed traders who have diverse private information about the cash flow innovations. First, we find that the optimum demand of informed traders is positively related to the precision of their private information. When the error variance increases, the informed traders face a higher risk and as a result they demand a smaller amount of the risky asset. Second, we tmd that the volatility of cash flow innovations has a positive impact on the optimum demand of informed traders. When the volatility of cash flow innovations increases, the informed traders' demand rises. This is quite plausible, since the higher the volatility of cash flow innovations, the higher is the uncertainty regarding the value of the risky asset and thus, the higher the value of private information.
Finally, we find the market depth is a linear function of the volatility of the uninformed traders and a weighted average of the total error variance of information. The depth is also decreasing in the volatility of the cash flow ~nnovations. This argument is in line with the second finding, when the volatility of cash flow innovations increases, the value of risky asset becomes more volatile, and as a result the bigger are the advantages of having private information. Our research raise some questions for further investigation. We indirectly assume that the informed traders make a profit at the expense on the uninformed traders. The question then why the uninformed traders willing to face losses? What happen if there are n informed traders who have diverse information?
Kata Kunci : informed traders, asset price behavior, market depth, cash flow innovations, and heterogeneous expectations
