Private Information and Asset Pricing: Financial Experiments - In Case the Aggregation of Information Does Not Provide the Unique Dividend Forecast

In this paper, we analyzed how market determines prices when private information is present. When there is private information in a market, an investor deduces what private information other investors may have from the market price. Private information in the market can be aggregated through such investor actions. When the aggregation of private information gives the unique forecast for the future dividend (defined as "complete private information market"), the transaction prices in the market converge to fully revealed rational expectation equilibrium price. If the aggregation of private information in the market cannot eliminate uncertainties, and does not provide the unique forecast ("incomplete private information market"), an investor may believe in wrong forecast, so the market may systematically provide mispricing. The bubble or the phenomenon such as crashes observed in actual markets may have occurred as a result of such investor actions.