Course Description

The topic of the course is imperfect information in financial markets. It is an introduction to information choice and learning with applications to corporate finance and asset pricing.

The goal of the course is (i) to give you an overview of the existing literature and (ii) to provide you with the technical tools needed to do research in this field.

Disclaimer
This document represents my current plans for the course at the time of writing, but is subject to change. Any changes will be promptly communicated.

Class Meetings
The class meets Tuesdays from 3:00PM to 6:15PM. The first class meeting is on May 6 and the last class meeting is on June 24.

Classroom:
Uni Wien, OMP, HS 17

Course Materials

1. Textbook
There is no required textbook for this course.

Here are two reference books that you might find helpful or interesting:

• Brunnermeier, Markus K., Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding, Oxford University Press, 2001.
• Vives, Xavier, Information and Learning in Markets: The Impact of Market Microstructure, Princeton University Press, 2008.

2. Articles
The course outline below lists articles that you should read before class. These are the articles that we will cover in detail in class.

Course Requirements and Grading
The grade for this course is based on four components:

1. Homework assignments: You will have to solve some problems that review the material covered in class.

2. Presentation: You will be assigned a paper that you have to present in class.

3. Research proposal: You are required to prepare a 5-10 page proposal for a research project in this area. Be sure to state the question clearly, describe the model you would use to answer this question, detail the data you would use if there is an empirical component to the project, describe the results that you would hope to find, and state why those results would be interesting/important.

4. Exam: The exam will be held during class on June 24.

Please log in with your WU account to use all functionalities of read!t. For off-campus access to our licensed electronic resources, remember to activate your VPN connection connection. In case you encounter any technical problems or have questions regarding read!t, please feel free to contact the library at readinglists@wu.ac.at.

gunter@gunterstrobl.com

1. Adverse Selection, Screening, and Signaling
• Akerlof, G., 1970, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics 84, 488–500.
• Spence, M., 1973, Job Market Signaling, Quarterly Journal of Economics 87, 355–374.
• Rothschild, M., and J. Stiglitz, 1976, Equilibrium in Competitive Insurance Markets, Quarterly Journal of Economics 90, 629–649.

2. Aggregation of Information by Prices: REE Models
• Milgrom, P., and N. Stokey, 1982, Information, Trade and Common Knowledge, Journal of Economic Theory 26, 17–27.
• Grossman, S. J., 1976, On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information, Journal of Finance 31, 573–585.
• Grossman, S. J., and J. E. Stiglitz, 1980, On the Impossibility of Informationally Efficient Markets, American Economic Review 70, 393–408.
• Wang, J., 1994, A Model of Competitive Stock Trading Volume, Journal of Political Economy 102, 127–168.

3. Strategic Trade Models
• Kyle, A. S., 1985, Continuous Auctions and Insider Trading, Econometrica 53, 1315–1335.
• Holden, C. W., and A. Subrahmanyam, 1992, Long-Lived Private Information and Imperfect Competition, Journal of Finance 47, 247–270.
• Admati, A. R., and P. Pfleiderer, 1988, A Theory of Intraday Patterns: Volume and Price Variability, Review of Financial Studies 1, 3–40.
• Spiegel, M., and A. Subrahmanyam, 1992, Informed Speculation and Hedging in a Noncompetitive Securities Market, Review of Financial Studies 5, 307–329.

4. Herding
• Banerjee, A. V., 1992, A Simple Model of Herd Behavior, Quarterly Journal of Economics 107, 797–817.
• Froot, K. A., D. S. Scharfstein, and J. C. Stein, 1992, Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation, Journal of Finance 47, 1461–1484.
• Scharfstein, D. S., and J. C. Stein, 1990, Herd Behavior and Investment, American Economic Review 80, 465–479.

5. Performance Manipulation and Strategic Disclosure
• Stein, J. C., 1989, Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior, Quarterly Journal of Economics 104, 655–669.
• Acharya, V. V., P. DeMarzo, and I. Kremer, 2011, Endogenous Information Flows and the Clustering of Announcements, American Economic Review 101, 2955–2979.
• Strobl, G., 2013, Earnings Manipulation and the Cost of Capital, Journal of Accounting Research 51, 449–473.

6. Financial Markets and Corporate Finance: Feedback Effects
• Bond, P., and I. Goldstein, 2015, Government Intervention and Information Aggregation by Prices, Journal of Finance 70, 2777–2811.
• Bond, P., I. Goldstein, and E. S. Prescott, 2010, Market-Based Corrective Actions, Review of Financial Studies 23, 781–820.
• Dow, J., I. Goldstein, and A. Guembel, 2017, Incentives for Information Production in Markets Where Prices Affect Real Investment, Journal of the European Economic Association 15, 877–909.
• Dow, J., and G. Gorton, 1997, Stock Market Efficiency and Economic Efficiency: Is There a Connection?, Journal of Finance 52, 1087–1129.
• Edmans, A., 2009, Blockholder Trading, Market Efficieny, and Managerial Myopia, Journal of Finance 64, 2481–2513.
• Edmans, A., I. Goldstein, and W. Jiang, 2015, Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage, American Economic Review 105, 3766–3797.
• Goldstein, I., and A. Guembel, 2008, Manipulation and the Allocational Role of Prices, Review of Economic Studies 75, 133–164.
• Goldstein, I., E. Ozdenoren, and K. Yuan, 2013, Trading Frenzies and Their Impact on Real Investment, Journal of Financial Economics 109, 566–582.
• Hirshleifer, D., A. Subrahmanyam, and S. Titman, 2006, Feedback and the Success of Irrational Investors, Journal of Financial Economics 81, 311–338.
• Holmström, B., and J. Tirole, 1993, Market Liquidity and Performance Monitoring, Journal of Political Economy 101, 678–709.