XT j=0
Where the " is dividend innovation, which are independently distributed with mean-zero normal random variables with variance 2. We only look at the case where t goes to in- finity. This simplifies things a great deal as we only need to focus on steady state trading strategies. Specifically this means that strategies do not depend on how close or …show more content…
We name these subinnovations z and each z is assumed to be independent but with the same variance 2 : "j = "1j + ... + "zj . The parameter z can be z thought of as a proxy for the rate of information flow. The higher the value of z is, the slower the information di↵uses among investors, leading to a larger underreaction e↵ect.
The timing of the information follows the following pattern. First at time t the informa- tion about "t+z 1 begins to spread to the newswatchers. That is, at time t newswatchers group 1 observes "1t+z 1, group 2 observes "2t+z 1 and so on through to group z, which observes the information "zt+z 1. At time t each subinnovation of "t+z 1 is known by a fraction 1/z of the newswatcher population. Then at time t + 1 the groups rotate and start to observe information from other groups. This way firm-specific information slowly di↵uses throughout the entire population of newswatchers, until time t + z 1, at which point all information is publicly known. This process of information di↵usion might seem unnecessary complicated, but it is done this way so that at any point in time, every group of newswatchers are on average equally well informed. This symmetry makes it simpler to solve for prices as shown …show more content…
All agents live until the ter- minal date T. Furthermore the supply of assets is set at a fixed rate Q and the risk free interest rate is normalized to zero. So far these assumptions are rather conventional. The next two assumptions are not, but they are key to the model’s results. At every time t newswatchers work out their demand for assets using the static optimisation notion that they buy the assets now and hold them to the end in period T, we call this assumption (a). More critically the newswatchers do not condition on current or past prices. This implies that the equilibrium in the model is a Walrasian equilibrium. This means that valuations are private and so the equilibrium is not a fully revealing rational expectations equilibrium. This assumption is named