Equilibrium with Heterogenous Information

We consider the equilibrium problem in the presence of information asymmetry. There are three investor types: informed, who initially see a noisy version of the terminal asset value; uninformed who see no signal; and noise,... [ view full abstract ]

We consider the equilibrium problem in the presence of information asymmetry. There are three investor types: informed, who initially see a noisy version of the terminal asset value; uninformed who see no signal; and noise, who think they are seeing a signal, but are seeing pure noise. All three types seek to maximize expected utility form terminal wealth.  Equilibrium consists of a market filtration, asset dynamics, and optimal strategies satisfying the clearing condition.  Under minimal conditions, equilibria are established using multiple filtration enlargements. Explicit identification of the market signal, the asset dynamics, and optimal trading strategies are given.