Appendix C. Numerical Example of Equilibrium in a Two-Period Rational Expectations Economy

A. Base values of parameters

Risk aversion

Correlation between supply increments Prior variance of risky asset payoff Prior expected value of risky asset payoff

Variance of per capita supply increment

Variance of the private signal error

B. Equilibrium price functions

P2 = 0.2106j0 + 0.7894m - 0.0979*i - 0.1002x2 Л = 0.5325JK) + 0.4675и - 0.3557

C. Equilibrium risky asset demand functions

di2 = 2.1358jo + 3.9154 + 3.91542

- 0.0638Д - 9.9802P2 dn = 1.4970j0 + 1.3142 - 2.8112Д

D. The conditional expected payoff

цп = E(u\atl) = 0.35180 + 0.6456yn + 0.0026Д M,2 s E(u\ai2) = 0.2079jo + 0.3850jrt

+ 0.3850j/2 - 0.0062Л + 0.0284/>2

References

Admati, A., 1985, A Noisy Rational Expectations Equilibrium for Multi-Asset Securities Markets, Econ-ometrica, 53, 629-658.

Admati, A., and P. Pfleiderer, 1986, A Monopolistic Market for Information, Journal of Economic Theory, 39, 400-438.

Alexander, S. S., 1964, Price Movements in Speculative Markets: Trends or Random Walks, Number 2, Industrial Management Review, Spring, 25-46.

Beaver, W. H., 1980, Information Efficiency, Accounting Review, 56, 23-27.

Beaver, W., R. Lambert, and D. Morse, 1980, The Information Content of Security Prices, Journal of Accounting and Economics, 2, 3-28.

Brown, D. P., and R. H.Jennings, 1988, A Two-Period Rational Expectations Equilibrium with Random Individual Endowment, Working Paper 335, School of Business, Indiana University.

Diamond, D. W., and R. E. Verrecchia, 1981, Information Aggregation in a Noisy Rational Expectations Economy, Journal of Financial Economics, 9, 221-235.

R= 1.0 p = 0

h0 = 0.4623

Уо = 2.79

Time 1 Time 2 V\ = 226.0 VI = 226.0 s, = 0.2529 52 = 0.2529

Fama, E. F., 1970, Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, 25, 383-417.

Fama, E. F., 1976, Foundations of Finance, Basic Books, Inc., New York.

Fama, E. F., and M. E. Blume, 1966, Filter Rules and Stock Market Trading, Journal of Business, 39, 226-241.

Grossman, S. J., 1976, On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information, Journal of Finance, 31, 393-408.

Grossman, S. J., and J. E. Stiglitz, 1980, On the Impossibility of Informationally Efficient Markets, American Economic Review, 70, 393-408.

Grundy, R., and M. McNichols, 1989, Trade and the Revelation of Information through Prices and Direct Disclosure, Working Paper 1049, Graduate School of Business, Stanford University.

Haugen, R., 1986, Modern Investment Theory, Prentice-Hall, Inc., Englewood Cliffs, NJ.

Hellwig, M. F., 1980, On the Aggregation of Information in Competitive Markets, Journal of Economic Theory, 22, 477-498.

Hellwig, M. F., 1982, Rational Expectations Equilibrium with Conditioning on Past Prices: A Mean-Variance Example, Journal of Economic Theory, 26, 279-312.

Jensen, M., 1967, Random Walks: Reality or Myth: Comment, Financial Analysts Journal, November-December, 77-85.

Jones, C, 1985, Investments.- Analysis and Management, Wiley, New York.

Latham, M., 1986, Informational Efficiency and Information Subsets, Journal of Finance, 41, 39-52.

Milgrom, P., 1981, Good News and Bad News: Representation Theorems and Applications, The Bell Journal of Economics, 12, 380-391.

Reilly, F., 1985, Investment Analysis and Portfolio Management (2d ed.), Dryden Press, Chicago.

Rosenlicht, M., 1968, Introduction to Analysis, Scott, Foresman and Company, Glenview, 111.

Rubinstein, M., 1975, Security Market Efficiency in an Arrow-Debreu Economy, American Economic Review, 65, 812-824.

Seelenfreund, A., G. С. С Parker, and J. С Van Home, 1968, Stock Price Behavior and Trading, Journal of Financial and Quantitative Analysis, 3, 263-281.

Singleton, K. J., 1985, Asset Prices in a Time Series Model with Disparately Informed, Competitive Traders, working paper, Graduate School of Industrial Administration, Carnegie-Mellon University.

Treynor, J. L., and R. Ferguson, 1985, In Defense of Technical Analysis, Journal of Finance, 40, 757-772.

Verrecchia, R. E., 1982, The Use of Mathematical Models in Financial Accounting, Journal of Accounting Research, 20, Supplement, 1-42.