Prices as Aggregators of Private Information: Evidence from S&P 500 Futures Data

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Abstract
This paper assesses the importance of the role of prices as aggregators of private information in the S&P 500 futures market. We estimate primitive parameters of the Hellwig (1980) noisy rational expectations model, when both prices and terminal values are observable. The variance-covariance parameters governing futures prices and terminal values can be inverted to obtain estimates of the primitive parameters, including the precision of private information and the variance of liquidity-motivated trades. We also estimate coefficients in the linear price conjecture, weights that agents place on different sources of information, and the informativeness of prices. We find that the variance of the error term in agents' private signals is several orders of magnitude larger than the variance of liquidity-motivated trades. But, in a large market, prices are still so informative that the market as a whole appears to weight them more than prior beliefs.

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