Faculty of Commerce and Business Administration, University of British Columbia. We acknowledge with thanks the helpful comments of Jim Brander, Ron Giammarino, Rob Heinkel, Vojislav Maksimovic, Duane Seppi, Joe Williams, and Josef Zechner.
Market Created Risk
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 3, pages 557–569, July 1989
How to Cite
KRAUS, A. and SMITH, M. (1989), Market Created Risk. The Journal of Finance, 44: 557–569. doi: 10.1111/j.1540-6261.1989.tb04378.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We develop a multiperiod rational expectations model of securities market equilibrium in which equilibrium prices may move between periods even though it is common knowledge that no new information has arrived about ultimate security payoffs. This happens because investors know they have imperfect information about the endowments of other investors and this knowledge affects their probability beliefs about the prices that will prevail at the intermediate trading date. These beliefs are reflected in the equilibrium at the initial trading date when investors focus on the probabilities of intermediate capital gains and losses, rather than ultimate payoffs.