David Easley - Academia.edu (original) (raw)

Papers by David Easley

In this chapter we survey asset pricing in dynamic economies with heterogeneous, rational traders... more In this chapter we survey asset pricing in dynamic economies with heterogeneous, rational traders. By ‘rational’ we mean traders whose decisions can be described by preference maximization, where preferences are restricted to those which have an subjective expected utility (SEU) representation. By ’heterogeneous” we mean SEU traders with different and distinct payoff functions, discount factors and beliefs about future prices which are not necessarily correct. We examine whether the market favors traders with particular characteristics through the redistribution of wealth, and the implications of wealth redistribution for asset pricing. The arguments we discuss on the issues of market selection and asset pricing in this somewhat limited domain have a broader applicability. We discuss selection dynamics on Gilboa-Schmeidler preferences and on arbitrarily specified investment and savings rules to see what discipline, if any, the market wealth-redistribution dynamic brings to this envi...

We propose a new welfare criterion that allows us to rank alternative financial market structures... more We propose a new welfare criterion that allows us to rank alternative financial market structures in the presence of belief heterogeneity. We analyze economies with complete and incomplete financial markets and/or restricted trading possibilities in the form of borrowing limits or transaction costs. We describe circumstances under which various restrictions on financial markets are desirable according to our welfare criterion.

Journal of Economic Theory, 2018

Annual Review of Economics, 2010

The market selection hypothesis states that, among expected utility maximizers, competitive marke... more The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this hypothesis holds, whereas in others it fails. It holds in complete-markets economies with a common discount factor and bounded aggregate consumption. It can fail when markets are incomplete, when consumption grows too quickly, or when discount factors and beliefs are correlated. These insights have implications for the general equilibrium modeling of asset prices and macroeconomic phenomena.

Handbook of the Economics of Finance, 2003

Introduction 2 Equilibrium asset pricing 3 Asset pricing in the short-run 3.1 The mechanics of pr... more Introduction 2 Equilibrium asset pricing 3 Asset pricing in the short-run 3.1 The mechanics of pricing behavior 3.2 The adjustment of prices to information 3.3 Statistical and structural models of microstructure data 3.4 Volume and price movements 4 Asset pricing in the long-run 4.1 Liquidity 4.2 Information 5 Linking microstructure and asset pricing: puzzles for researchers References * We would like to thank Joel Hasbrouck, Ravi Jagannathan, Ren 6 Stulz, and Ivo Welch for helpful comments.

Organization with Incomplete Information

In this paper we provide an overview of the methods of analysis and results obtained, and, most i... more In this paper we provide an overview of the methods of analysis and results obtained, and, most important, an assessment of the success of rational learning dynamics in tying down limit beliefs and limit behavior. We illustrate the features common to rational or Bayesian learning in single agent, game theoretic and equilibrium frameworks. We show that rational learing is possible in each of these environments. The issue is not in whether rational learning can occur, but in what results it produces. If we assume a natural complex parameterization of the choice environment all we know is the rational learner believes that his posteriors will converge somewhere with prior probability one. Alternatively, i f w e, the modelers, assume the simple parameterization of the choice environment that is necessary to obtain positive results we are closing our models in the ad hoc fashion that rational learning was inroduced to avoid. We believe that a partial resolution of this conundrum is to pay more attention to how learning interacts with other dynamic forces. We show that in a simple economy, the forces of market selection can yield convergence to rational expectations equilibria even without every agent behaving as a rational learner.

SSRN Electronic Journal, 2008

This paper investigates the linkage of microstructure, accounting, and asset pricing. We determin... more This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. Our results provide strong support for information risk affecting asset returns, and suggest that PIN weakens, but does not remove, the role of size in asset returns.

2011 IEEE 52nd Annual Symposium on Foundations of Computer Science, 2011

Journal of Economic Theory, 2015

This essay introduces the symposium on computer science and economic theory.

ACM Transactions on Economics and Computation, 2013

There are a number of domains where agents must collectively form a network in the face of the fo... more There are a number of domains where agents must collectively form a network in the face of the following trade-off: each agent receives benefits from the direct links it forms to others, but these links expose it to the risk of being hit by a cascading failure that might spread over multistep paths. Financial contagion, epidemic disease, the exposure of covert organizations to discovery, and electrical power networks are all settings in which such issues have been articulated. Here we formulate the problem in terms of strategic network formation, and provide asymptotically tight bounds on the welfare of both optimal and stable networks. We find that socially optimal networks are, in a precise sense, situated just beyond a phase transition in the behavior of the cascading failures, and that stable graphs lie slightly further beyond this phase transition, at a point where most of the available welfare has been lost. Our analysis enables us to explore such issues as the trade-offs betw...

The New Palgrave Dictionary of Economics

Realized profits, not maximum profits, are the mark of success and viability. It does not matter ... more Realized profits, not maximum profits, are the mark of success and viability. It does not matter through what process of reasoning or motivation such success was achieved. The fact of its accomplishment is sufficient. This is the criterion by which the economic system selects survivors: those who realize positive profits are the survivors; those who suffer losses disappear. Alchian (1950)

Review of Financial Studies, 1997

Using the model structure of Easley and O'Hara (Journal of Finance, 47, 577-604), we demonstrate ... more Using the model structure of Easley and O'Hara (Journal of Finance, 47, 577-604), we demonstrate how the parameters of the market-maker's beliefs can be estimated from trade data. We show how to extract information from both trade and no-trade intervals, and how intraday and interday data provide information. We derive and evaluate tests of model specification and estimate the information content of differential trade sizes. Our work provides a framework for testing extant microstructure models, shows how to extract the information contained in the trading process, and demonstrates the empirical importance of asymmetric information models for asset prices. The theoretical market microstructure literature abounds with structural models of the market-maker's price-setting decision problem in securities markets. These models [Glosten and Milgrom (1985); Kyle

The Journal of Finance, 2004

The Journal of Finance, 2002

We investigate the role of information-based trading in affecting asset returns. We show in a rat... more We investigate the role of information-based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information-based trading, and we estimate this measure using data for individual NYSE-listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French~1992! asset-pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information-based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year. ASSET PRICING IS FUNDAMENTAL to our understanding of the wealth dynamics of an economy. This central importance has resulted in an extensive literature on asset pricing, much of it focusing on the economic factors that inf luence asset prices. Despite the fact that virtually all assets trade in markets, one set of factors not typically considered in asset-pricing models are the features of the markets in which the assets trade. Instead, the literature on asset pricing abstracts from the mechanics of asset price evolution, leaving unsettled the underlying question of how equilibrium prices are actually attained. Market microstructure, conversely, focuses on how the mechanics of the trading process affect the evolution of trading prices. A major focus of this extensive literature is on the process by which information is incorporated into prices. The microstructure literature provides structural models of how prices become efficient, as well as models of volatility, both issues clearly of importance for asset pricing. But of perhaps more importance, microstructure models pro

The Journal of Finance, 1996

Purchased order flow refers to the practice of dealers or trading locales paying brokers for reta... more Purchased order flow refers to the practice of dealers or trading locales paying brokers for retail order flow. It is alleged that such agreements are used to "cream skim" uninformed liquidity trades, leaving the information-based trades to established markets. We develop a test of this hypothesis, using a model of the stochastic process of trades. We then estimate the model for a sample of stocks known to be used in order purchase agreements that trade on the New York Stock Exchange (NYSE) and the Cincinnati Stock Exchange. Our main empirical result is that there is a significant difference in the information content of orders executed in New York and Cincinnati, and that this difference is consistant with cream-skimming.

The Journal of Finance, 2010

Journal of Financial Economics, 1987

This paper investigates the effect of trade size on security prices. We show that trade size intr... more This paper investigates the effect of trade size on security prices. We show that trade size introduces an adverse selection problem in:o security tradin, 0 because, given that they wish to trade. informed traders perfer to trade larger amounts at any given price. As a result, market makers' pricing strategies must also depend on trade size. with large trades being made at less favorable prices. Our model provides one explanation for the price effect of block trades and demonstrates that both the size and the sequence of trades matter in determining the price-trade size relationship.

Journal of Financial Economics, 2010

During the 2007-2009 financial crisis there was little or no trading in a variety of financial as... more During the 2007-2009 financial crisis there was little or no trading in a variety of financial assets, even though bid and ask prices existed for many of these assets. We develop a model in which this illiquidity arises from uncertainty, and we argue that this new form of illiquidity makes bid and ask prices unsuitable as metrics for establishing ''fair value'' for these assets. We show how the extreme uncertainty that traders face can be characterized by incomplete preferences over portfolios, and we use Bewley's (2002) model of decision making under uncertainty to derive equilibrium quotes and the nonexistence of trading at these quotes. We then suggest alternatives for valuing assets in illiquid markets.

Journal of Empirical Finance, 1997

The trade process is a stochastic process of transactions interspersed with periods of inactivity... more The trade process is a stochastic process of transactions interspersed with periods of inactivity. The realizations of this process are a source of information to market participants. They cause prices to move as they affect the market maker's beliefs about the value of the stock. We fit a model of the trade process that allows us to ask whether trade size is important, in that large and small trades may have different information content (they do, but this varies across stocks); whether uninformed trade is i.i.d. (it is not); and, whether large buys and large sells are equally informative (they differ only marginally). The model is fitted by maximum likelihood using transactions data on six stocks over 60 days.

Journal of Economic Theory, 2002