Three essays on information and markets

grantor: University of TorontoThis thesis is comprised of three essays which deal with issues of information and markets. The first essay shows that in the context of a simple market model, the core is sensitive to the informational requirements imposed on blocking coalitions. Several core concepts are introduced, each derived by imposing different informational requirements on blocking coalitions. In the context of games satisfying strict small group effectiveness, one of these core concepts is proven to be equivalent to the traditional core concept. Some asymptotic equivalence results for large games are also derived. The second essay uses a 3-period 2-type-of-agent model to illustrate some important issues in asset pricing theory. We derive endogenous price uncertainty as a consequence of heterogeneous beliefs about Knightian uncertainty about fundamentals. This supports an idea in Epstein and Wang (1994) that uncertainty may lead to excess volatility in asset prices. We also show that uncertainty in an economy in general has a negative impact on trade volume. However, when we introduce a market for options (price contingent contracts) as a way for agents to insure against this uncertainty, trade volume will increase. As a by-product, this result shows a clear case where the introduced options are not redundant, even when the market before the introduction of options was complete. The third essay deals with issues associated with deseasonalization in the context of high frequency data analysis in financial markets. It presents statistical properties of different frequency data and strong evidence of intraday seasonality in the high frequency data. It compares four different deseasonalization methods in terms of descriptive statistics, autocorrelation functions, and model specific in-sample fit using different frequencies of data. In line with analysis on model specific in-sample fit, the essay also investigates the relation between the foreign exchange rate dynamics and the explicit news arrivals in foreign exchange market places as measured by news headlines from the Reuters 'AAMM' screen using an augmented ' GARCH'('1,1') model.Ph.D