Equilibrium Price with Institutional Investors and with Naive Traders

摘要

This paper uses an equilibrium model to study how institutional investors211u001einfluence the volatility and the informativeness of asset prices. The growth in 211u001ethe proportion of U.S. equities owned by institutions in the past two decades, 211u001etheir resulting dominant position in financial markets, and empirical evidence 211u001ethat institutional ownership may increase volatility warrant studying this issue 211u001efrom a theoretical standpoint. In this paper, institutional investors are assumed 211u001eto be 'rational' informed traders while individual investors are supposed to be 211u001e'naive' informed traders, insofar as the former use the equilibrium price to 211u001eextract information while the latter do not. Using a framework with a competitive 211u001emarket, multiple informed traders and one liquidity trader, the paper compares 211u001ethe informativeness and the volatility of the equilibrium price in an economy 211u001ewhere the informed traders are naive and in one where they are rational. The 211u001emodel also studies how the informativeness and the volatility of the price react 211u001eto changes in parameters such as the quality of the information of the informed 211u001etraders, their aversion to risk, the variance of the true asset price, etc. The 211u001epaper finally investigates how an increase in the number of informed traders, 211u001ewhether they are rational or naive, affects the price variance, and assesses the 211u001eimpact of transaction costs on the variance of the price and its informativeness.