We show that the infinite regression problem in models with differentially informed traders can be solved using a fixed point method, which we can use to derive the dynamic equilibrium in a multi-auctions model with diversely informed traders. We find that when the informed traders’ signals are not perfectly correlated, their private information will be revealed to the market gradually so that the market is only semi- strong form efficient and not strong- form efficient. Market depth in the continuous auctions model initially increases with time, but decreases to zero at the end. Our results are in contrast to the results of Holden and Subrahmanyam (1992) and Foster and Viswanathan (1993) (HS-FV) who showed that when auctions occur frequently and informed traders have perfect information, the information is revealed to the market almost immediately. However, when the correlation in the private signal goes to 1, our model converges to the HS- FV model.

This paper uses a noisy rational expectations model to derive predictions about the dynamic behaviour of the proportion of institutional money managers in a given country who are bullish about the equity market in different countries. The predictions are tested using monthly data for four countries for the period October 1995 to October 2000. The empirical findings are consistent with the hypothesis of informational asymmetries between capital market participants in diffent countries.