TRADING, COMMUNICATION AND THE RESPONSE OF ASSET PRICES TO NEWS.

The article examines the relationship between asset price changes and the arrival of news. The price response may show a pattern which bears little similarity with the final valuation of the asset, or to the date at which information arrived, when information is hard to interpret. An example of an information structure with two traders which can display an apparently anomalous price path is provided. Information structures which differ from the standard truth-plus noise paradigm generally can lead to a rich pattern of price responses, while being consistent with rationality.