Venter, György
(2011)
Essays on asymmetric information and trading constraints.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis contains three essays exploring the asset pricing implications of asymmetric information and trading constraints.
Chapter 1 studies how short-sale constraints affect the informational efficiency of market
prices and the link between prices and economic activity. I show that under short-sale constraints security prices contain less information. However, short-sale constraints increase the
informativeness of prices to some agents who learn about the quality of an investment opportunity from market prices and have additional private information. This, in turn, can lead
to higher allocative efficiency in the real economy. My result thus implies that the decrease
in average informativeness due to short-sale constraints can be more than compensated by
an increase in informativeness to some agents.
In Chapter 2, I develop an equilibrium model of strategic arbitrage under wealth constraints. Arbitrageurs optimally invest into a fundamentally riskless arbitrage opportunity,
but if their capital does not fully cover losses, they are forced to close their positions. Strategic arbitrageurs with price impact take this constraint into account and try to induce the
fire sales of others by manipulating prices. I show that if traders have similar proportions
of their capital invested in the arbitrage opportunity, they behave cooperatively. However,
if the proportions are very different, the arbitrageur who is less invested predates on the
other. The presence of other traders thus creates predatory risk, and arbitrageurs might be
reluctant to take large positions in the arbitrage opportunity in the first place, leading to an
initially slow convergence of prices.
Chapter 3 (joint with Dömötör Pálvölgyi) studies the uniqueness of equilibrium in a
textbook noisy rational expectations economy model a la Grossman and Stiglitz (1980). We
provide a very simple proof to show that the unique linear equilibrium of their model is the
unique equilibrium when allowing for any continuous price function, linear or not. We also
provide an algorithm to create a (non-continuous) equilibrium price that is different from the
Grossman-Stiglitz price.
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