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Essays in asset pricing and information economics

Author: Dimitrakas, Vassilios INSEAD Area: FinancePublisher: Fontainebleau : INSEAD, 2008.Language: EnglishDescription: 113 p. ; 30 cm.Type of document: INSEAD ThesisThesis Note: For the degree of Ph.D. in management, INSEAD, March 2008Bibliography/Index: Includes bibliographical referencesAbstract: This dissertation consists of three independent essays, two in the field of Asset Pricing Theory and one in Information Economics. The first essay is called "Asset Pricing Implications of Investor Inertia." Its objective is to investigate whether infrequent adjustment to information affects the performance of the Consumption Capital Asset Pricing Model. I analyze an economy with a representative investor who observes the changes of one state variable infrequently and at regular time intervals. As a consequence, she reacts to economic shocks with delay and appears "inert" to arrival of new information. The main finding of the paper is that, if investors are inert or information arrives to them in lumps, the econometrician should sample returns before new information becomes available in the economy. The second essay is called "Portfolio Selection with Stochastic Transaction Costs." This paper describes the optimal investment strategy of a rational investor in an economic environment where the transaction costs behave as a two-state Markov Chain. I show that the investor always trades off the benefit of achieving optimal risk-adjusted growth for his portfolio by staying close to a modified "Merton Line" with the benefit of waiting until the transaction costs ebb to lower size. This trade-off depends on the size of the costs at each state and the average duration of the high-cost state. It however does not depend on the duration of the no-costs state, the risk aversion or the riskiness of the stock. The third essay, co-authored with Yianis Sarafidis, is called "Cheap Talk From An Expert With Unknown Motives." We address the question of how the uncertainty about an expert's motives affects the quality of information that the expert can transmit to a decision maker via cheap talk. All equilibria are shown to be partitional. There are three new main results. First, we show that there exists an equilibrium of size k for all integers k. Second, we identify conditions that guarantee the uniqueness of each size-k equilibrium. Moreover, when Sender-types are uniformly distributed, we show that equilibria can be expressed in a relatively simple form and they have certain convenient properties. List(s) this item appears in: Ph.D. Thesis
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For the degree of Ph.D. in management, INSEAD, March 2008

Includes bibliographical references

This dissertation consists of three independent essays, two in the field of Asset Pricing Theory and one in Information Economics. The first essay is called "Asset Pricing Implications of Investor Inertia." Its objective is to investigate whether infrequent adjustment to information affects the performance of the Consumption Capital Asset Pricing Model. I analyze an economy with a representative investor who observes the changes of one state variable infrequently and at regular time intervals. As a consequence, she reacts to economic shocks with delay and appears "inert" to arrival of new information. The main finding of the paper is that, if investors are inert or information arrives to them in lumps, the econometrician should sample returns before new information becomes available in the economy. The second essay is called "Portfolio Selection with Stochastic Transaction Costs." This paper describes the optimal investment strategy of a rational investor in an economic environment where the transaction costs behave as a two-state Markov Chain. I show that the investor always trades off the benefit of achieving optimal risk-adjusted growth for his portfolio by staying close to a modified "Merton Line" with the benefit of waiting until the transaction costs ebb to lower size. This trade-off depends on the size of the costs at each state and the average duration of the high-cost state. It however does not depend on the duration of the no-costs state, the risk aversion or the riskiness of the stock. The third essay, co-authored with Yianis Sarafidis, is called "Cheap Talk From An Expert With Unknown Motives." We address the question of how the uncertainty about an expert's motives affects the quality of information that the expert can transmit to a decision maker via cheap talk. All equilibria are shown to be partitional. There are three new main results. First, we show that there exists an equilibrium of size k for all integers k. Second, we identify conditions that guarantee the uniqueness of each size-k equilibrium. Moreover, when Sender-types are uniformly distributed, we show that equilibria can be expressed in a relatively simple form and they have certain convenient properties.

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