TY  - JOUR
AU  - Gorton,Gary
AU  - Dow,James
TI  - Trading, Communication and the Response of Price to New Information
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3687
PY  - 1991
Y2  - April 1991
UR  - http://www.nber.org/papers/w3687
L1  - http://www.nber.org/papers/w3687.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

James Dow
London Business School
Sussex Place
Regent's Park, London
NW1 4SA  UK
Tel: 4402072625050 Ext3317
Fax: 4402077243317
E-Mail: jdow@london.edu
AB  - The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn over time from market prices. The model introduces an information structure which is intended to capture the notion that information is difficult to interpret. Strategic interaction and the complexity of the information result in a protracted price response. Indeed, equilibrium price paths of the model may display reversals in which the two traders rationally revise their beliefs, first in one direction, and then in the opposite direction, even though no new information has entered the system. A piece of information which is initially thought to be bad news may be revealed, through trading, to be good news.
ER  -