Prices as Aggregators of Private Information: Evidence from the S&P 500 Futures Market

28 Pages Posted: 30 Mar 1999

See all articles by Jin-wan Cho

Jin-wan Cho

affiliation not provided to SSRN

Murugappa (Murgie) Krishnan

Yeshiva University

Date Written: September 1999

Abstract

This paper assesses the importance of the role of prices as aggregators of private information in the S&P 500 futures market. We estimate primitive parameters of the Hellwig (1980) noisy rational expectations model, when both prices and terminal values are observable. The variance-covariance parameters governing futures prices and terminal values can be inverted to obtain estimates of the primitive parameters, including the precision of private information and the variance of liquidity motivated trades. We also estimate coefficients in the linear price conjecture, weights that agents place on different sources of information, and the informativeness of prices. We find that the variance of the error term in agents' private signals is several orders of magnitude larger than the variance of liquidity motivated trades. But in a large market prices are still so informative that the market as a whole appears to weight them more than prior beliefs.

JEL Classification: G12, G13, D82, M41, M45

Suggested Citation

Cho, Jin-wan and Krishnan, Murugappa (Murgie), Prices as Aggregators of Private Information: Evidence from the S&P 500 Futures Market (September 1999). Available at SSRN: https://ssrn.com/abstract=155829 or http://dx.doi.org/10.2139/ssrn.155829

Jin-wan Cho (Contact Author)

affiliation not provided to SSRN

Murugappa (Murgie) Krishnan

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

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