In the third paper, using a simple model of asset pricing under asymmetric information, we show that asymmetric patterns of lead-lag predictability cannot be solely explained by information asymmetry. Additional frictions, such as transaction costs, are necessary to produce asymmetry in the cross-auto correlations. We also offer a model with non-fundamental speculation, and we show that the model produces negative cross-autocorrelations; a novel feature that has been missing in all previous models of asymmetric information; but has been recently documented for longer horizons (e.g. monthly returns).
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign