Asymmetric Information in Fads Models

Fads models were introduced by Shiller (1984) and Summers (1986) as plausible alternatives to the efficient markets/constant expected returns assumptions. Under these models, logarithms of asset prices embody both a martingale component, with permanent shocks, and a stationary component, with temporary shocks. We study a continuous-time version of these models from both the point of view of informed agents, who can observe both fundamental and market values, and from that of uninformed agents, who can only observe market prices. We specify the asset price in the larger filtration of the informed agent, and then derive its decomposition in the smaller filtration of the uninformed agent using the Hitsuda representation of Gaussian processes. For uninformed agents we obtain a non-Markovian dynamics, which justifies the use of technical analysis in optimal trading strategies. For both types of agents, we solve the problem of maximization of expected logarithmic utility from terminal wealt...

• Type: Journal
• Year: 2006
• Where: FS
• Authors: Paolo Guasoni
• Keywords: Asset Price, Fads, FS 2006, Uninformed Agents