Although there is some evidence that Matthew Rabin existed before 1990, we had the pleasure of discovering him for ourselves when, in the early 1990s, he sent each of us a copy of his manuscript “Incorporating Fairness into Game Theory and Economics ” [2]. Matthew was, at this time, an assistant professor in Berkeley’s economics department, having recently finished his graduate training at MIT. The paper was remarkable in many ways, and it induced us both to call around and ask: “Who is this guy Rabin? ” Now, just a decade later, we find ourselves writing an article in honor of his winning the John Bates Clark award. So, who is this guy? Fairness In explaining who Matthew Rabin is, and why he deserved the Clark award, we will start with that remarkable fairness paper. Economists and game theorists have long used two standard assumptions in modeling behavior: rationality and selfinterest. These working assumptions persisted in spite of growing experimental evidence that both rationality and self-interest are “bounded. ” In game theoretic contexts, evidence that people care how much others get was abundant: In a standard one-trial prisoner’s dilemma game, where the rational selfish choice is to defect, roughly half the players cooperate. Or consider the ultimatum game, in

This paper studies the role of the foreign market in the price discovery process of cross-listed stocks when the trading period partially overlaps with the domestic market. It is shown that the usual vector error correction methodology applied to close-to-close returns is biased due to the systematic assignation of the overlapping period’s price discovery to one market. An alternative methodology is proposed that avoids this bias. Both methodologies are implemented on the most traded Spanish firms on the NYSE. It is found that the NYSE has a high contribution to these stocks ’ price discovery process.

Closed-end country funds trade in New York at their price. Their Net Asset Value (NAV) represent the value of the underlying assets, usually traded in each particular country. If the holders of the underlying assets have more information the about local assets than the country fund holders, changes in NAVs will tend to explain future changes in prices but not vice versa. This paper shows that most NAVs appear exogenous; while most prices reject exogeneity. Past changes in NAVs and discounts predict current prices more frequently than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability--but not with the fund price (NAV) variability. These findings are consistent with the existence of asymmetric information in international capital markets. The appendix introduces a model of asymmetric information, that rationalizes our empirical findings. Different perceived risk makes foreign investors willing to less pay for local assets than domestic investors. Therefore, country fund prices (driven mainly by small U.S. investors) tend to be lower than NAVs (driven mainly by domestic and large foreign investors). Two other propositions are derived. First, since NAVs and prices are linked by a long-run

In the rational expectations equilibrium of this paper, agents have private information and differing information partitions and therefore assign differing conditional distributions to asset payoffs and other economic variables relevant to their investment choices. Standard asset pricing models typically do not recognize the impact of these differing information partitions, and empirical tests based on these models thus measure asset riskiness in a way that may not be relevant to any of the agents ’ decisions. I show how this can lead to distorted estimates of investment risk and how it can make the equity premium appear difficult to explain.

This paper develops a common-factor model to investigate relationships between security returns/return volatility and trading volume. The model generalizes Tauchen and Pitts ’ (1983) MDH model by capturing possible interactions among securities. In our model, both price changes and trading volume are governed by three kinds of mutually independent variables: common factor variables, latent information variables and idiosyncratic variables. Despite its similarity to Hasbrouck and Seppi’s (2001) model in terms of the form, the model extraordinarily allows us to identify the cause of interactions among securities by decomposing factor loadings into constant and random components. Three key implications are reached from our model. First, common factor structures in returns and trading volume stem from information flows. Second, returns ’ common factors are not related to trading volume’s common factors. This implication directly opposes Hasbrouck and Seppi’s (2001) assumption. Finally, cross-firm variations of returns and volume respectively rely on underlying latent information flows. The positive relation between return volatility and volume also results only from underlying latent information flows. Thus, common factor structures in returns and trading volume have no additional explanatory power in cross-firm variations and the positive return volatility-volume relationship. We fit the model for intraday data of Dow Jones 30 stocks using the EM algorithm. The results support specifications of our model. The empirical results demonstrate 3-factor structures in returns and trading volume, respectively. All 30 stocks in our sample are 1 governed by at least one common factor. This fact implies that our model outperforms Tauchen and Pitts ’ (1983) model because their model is a special case of our model without the presence of common factors. We also show that after controlling the effect of information flows, persistence in return variance disappears. 2 Commonality, Information and Return/Return Volatility −Volume Relationship 1.

In this paper, we derive and experimentally test a theoretical model of speculation in multi-period asset markets with public information flows. The speculation arises from the traders ’ heterogeneous posteriors as they make different inferences from sequences of public information. This leads to overpricing in the sense that price exceeds the most optimistic belief about the real value of the asset. We find evidence of speculative overpricing in both incomplete and complete markets, where the information flow is a gradually revealed sequence of imperfect public signals about the state of the world. We also find evidence of asymmetric price reaction to good news and bad news, another feature of equilibrium price dynamics under our model. Markets with a relaxed short-sale constraint This paper studies equilibrium pricing dynamics in a simple dynamic asset market where traders have heterogeneous beliefs and face the short-sale constraint. We analyze a model that follows from a long line of theoretical research initiated by Harrison and Kreps

We analyze a binary prediction market in which traders have heterogeneous prior beliefs and private information. Realistically, we assume that traders are allowed to invest a limited amount of money (or have decreasing absolute risk aversion). We show that the rational expectations equilibrium price underreacts to information. When favorable information to an event is available and is revealed by the market, the price increases and this forces optimists to reduce the number of assets they can (or want to) buy. For the market to equilibrate, the price must increase less than a posterior belief of an outside observer.