Learning, Market Frictions, and Asset Pricing

An important function of the financial markets is to generate and process information. More informative asset prices bring down the cost of capital for holders of the underlying assets and help enhance social welfare. In an ideal financial market, information production is maximized and the asset price fully reflects the available information. In reality, however, investors' information production may not be sufficient and the asset price may not fully reflect the available information. Therefore, it is important to understand investors' incentives to learn private information and the market frictions which prevent the asset price from converging to its fundamental value. My dissertation explores these two important issues in three different aspects: (i) how investors' trading horizons affect their incentive to learn private information; (ii) how public information and the derivative markets can influence their private information production; and (iii) how small supply shocks can exert significant price impact in liquid financial markets, i.e. U.S. Treasury auctions.