Measuring private information in the financial assets market: Evidence and implications from S&P 500 futures prices
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Noisy Rational Expectation Equilibrium theory in the financial asset market was started by Grossman (1976, 1978, and 1981), and Grossman and Stiglitz (1980) as a key innovation to traditional asset market theory. Asymmetric information is acquired by investors and in equilibrium, the market clearing price aggregates and conveys all private and public information. Following these studies, there have been numerous developments and variations of the theory. However, there is still little empirical evidence to support the original Noisy REE model. Our study takes off from Jin-Wan Cho and Murugappa Krishnan (2000) paper in which they applied the Noisy Rational Expectation Equilibrium model using data on S&P500 Futures prices and tried to retrieve basic parameters of the model. Instead of weekly data, I use daily as well as intra-day prices and develop a unique "chained estimation" method to allow the model's parameters to vary over the 22 years of data in my sample (S&P500 Futures was first introduced in 1982). The analysis produces strong evidence showing that there exists private asset management in the market, whereby investors are using their prior knowledge and public information (including asset prices) to optimally acquire costly private information and to trade assets. The market clearing prices aggregate all private information acquired by investors. Using our methodology, we are able to show that private asset management varies over time. More specifically, our work produces measurements of basic parameters of the futures' assets market that indicate the existence of private information in the market and traces their variation over time. From these findings, we have a better understanding not only of the extent to which the informational content of the market changes over time, but also about the way the changes in the market parameters impact the expected price levels of the assets themselves. The contribution of our empirical application of the noisy Rational Expectation Equilibrium rests also on the innovative "Chained Estimation" methodology we offer, which enables a systematic estimation of the key parameters of the model. This methodology improves Jin-Wan Cho and Murugappa Krishnan (2000) earlier work by allowing the basic model parameters to vary over time, thus making the estimation more accurate and allowing for their economic interpretation.