- I Have A Question In Economics F Now Consider The Following Modification Of Exercise 1 The Uninformed Investor Is Ris 1 (91.37 KiB) Viewed 66 times
the uninformed investor is risk neutral. How does this affect your
results?
g) What would happen, if all investors were risk
neutral?
h) How will your results of exercise 1 change, when the
uninformed investor is replaced by a pure “liquidity trader” with
completely random trading motives? How is equilibrium affected? How
much information is communicated by the price system?
i) Can you interpret your findings in the context of
international financial markets?
= Consider a stock with normally distributed terminal wealth . Terminal wealth is factored into two factors V fi +32, which are both independently and normally distributed with mean fi,i = 1,2 and variances o;. The stock is in unit supply. There are three types of investors. A single type-1 investor observes the realization of fi, a single type-2 investor observes the realization of factor fa and a type-3 investor, who does not observe any of the above factors. All investors, however, can observe market prices. All investors exhibit constant absolute risk aversion with common parameter b>0. a) What is constant absolute risk aversion? (1 point) b) How could you interpret the information scenario in economic terms? (1 point) c) Define a financial markets equilibrium for this economy. (4 points) d) Is it possible to determine a market equilibrium for the above economy? How does your result depend on b? How does investors' wealth enter? Explain carefully! (4 points) e) What would happen in the above economy if both partially informed investors were banned from trading? In which cases would the uninformed investor be possibly better off? In which cases not? Explain carefully! (2 points) (Hint: The asset demand function reads D(p)= Kvar 465|1|E6|1) – pR), where I b represents traders' information set.)