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Essays on asymmetric information and trading constraints

Venter, György (2011) Essays on asymmetric information and trading constraints. PhD thesis, The London School of Economics and Political Science.

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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.

Item Type: Thesis (PhD)
Additional Information: © 2012 György Venter
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Vayanos, Dimitri and Yuan, Kathy
URI: http://etheses.lse.ac.uk/id/eprint/406

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