How Noisy are Noisy Rational Expectations? Evidence from a Currency Futures Market
Posted: 20 Dec 1998
Date Written: December 1993
This paper takes a step towards assessing the importance of the role of prices as signals of aggregate information, by developing an approach to estimating primitive parameters of a noisy rational expectations model under perfect competition, when both prices and terminal values are observable. We show that the equilibrium variance-covariance parameters in the Hellwig (1980) model can be inverted to obtain values of the primitive parameters. This lets us identify the MLE of the precision of private information, using only restrictions on parameter values from the underlying theory and provides, conditional on a level of risk aversion, the MLE of the variance of exogenous supply noise. Using data from a currency futures market we then present estimates of the primitive parameters, of the signal-to-noise ratio, of weights that agents place on different sources of information, and of coefficients in the linear price conjecture.
JEL Classification: G13
Suggested Citation: Suggested Citation