Public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information. When the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports, market prices observed in equilibrium can be given a simple characterization that relies only on the face value of the announcement. Also, this characterisation predicts that the return variance following a bad outcome is higher than it would have been if the outcome were good. When investors are risk averse, this leads to negative serial correlation of asset returns.
Publication Date
Financial Markets Group Discussion Papers DP 371