SFB 303 Discussion Paper No. A - 443

Author: Nöldeke, Georg
Title: Testing Financial Market Equilibrium under Asymmetric Information: A Comment
Abstract: In a recent paper Lang, Litzenberger, and Madrigal (1992) (henceforth LLM) use data on volume, prices, and individual traders' forecasts of earnings to test theories of financial market equilibrium under asymmetric information. Their main conclusion is that "empirical results strongly support the noisy rational expectations hypothesis" (LLM, p.317). This note shows that (a) the parameter restrictions tested by LLM are not implied by their theoretical model under noisy rational expectations and (b) the estimation results reported in LLM provide strong evidence against the noisy rational expectations hypothesis and all other hypotheses they consider.
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Creation-Date: April 1994
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