Question
Consider the model of gradual flow of information in Hong and Stein (2007). Suppose that there are two possible models, model I and model II,
Consider the model of "gradual flow of information" in Hong and Stein (2007). Suppose that there are two possible models, model I and model II, that determine dividends in financial markets. In economy A, every investor believes in model I. In economy B, 40% of the investors believe in model I and 60% believe in model II. Suppose also that prices equal fundamental values in both economies. Which of the following statements is true.
A. | There is trading in economy B but no trading in economy A. | |
B. | There is trading in both economies. | |
C. | There is trading in economy A but no trading in economy B. | |
D. | There is no trading in both economies. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started