Ambiguous private information leads to informational inefficiency of asset prices in rational expectations equilibrium.
This inefficiency implies lower asset price as uninformed traders require a premium to hold assets. This premium is increasing in the riskiness of the asset. The market exhibits excess volatility, price swings, and relatively large volatility variation and illiquidity variation as measured by price sensitivity variation across informational eciency regimes. Public information a ffects the informational efficiency of price and can also lead to relatively large changes in volatility and illiquidity.