This article does not focus on any special methods or techniques for pricing a share, but concentrates on the relationship between equilibrium price(s) of a share and competitive interactions of rational investors. In this article, it attempts to establish a model combining “Bayesian Game” theory concerned on “non-cooperative games of incomplete information” and “Random Walk” theory together to illustrate process of how new equilibrium price(s) will be achieved in incomplete information when new information is released into market. Moreover, due to incomplete information structure and bargaining behaviors from rational investors for maximizing their expected utility respectively in this model, it leads to a deviation between new equilibrium price(s) and value of a share (Pareto-optimality). From this conclusion, it can be stated that rational investors’ strategies or behaviors make sense for change of share price. Furthermore, since the real market is not perfect market, so 1.when rational investors price a share, they not only need to estimate value of the share, but also should consider about beliefs and strategies from opponents; 2.if behavioral patterns among rational investors can be described by the model from process of new equilibrium price(s) achieved, change of a share price will be predicted more precisely.

A government policy aimed at the reduction of state shares in state-owned enterprises (SOE) triggered a crash in Chinas stock market. The sustained depression and spillover even after the policy adjustments were over constitute a puzzle the so-called state-share paradox. The empirical study finds evidence in two dimensions. First, a regime switching model with an absorbing state suggests that government policy switches the regime to liquidity black holes. Second, there is no evidence of light-to-liquidity during the crash, suggesting to model the crash as an aggregate phenomenon of the whole market. To carefully match the evidence, a theoretical model is set up within the framework of market microstructure. The state-share paradox is not a simply instance of news-driven crash. The model shows that Chinas stock market has distinctive features of liquidity production and price discovery. The irregularities of a representative liquidity supporter generate an inverted-S demand curve and give rise to potential liquidity black holes. Multiple equilibria and the resulting large drop in prices arise from supply dynamics of short-run investors, who buy the stock from the primary market liquidate their long positions in the secondary market. This study contributes a rational panics hypothesis to the literature. The rational panics hypothesis is neither an rational model with noise traders, nor a standard rational expectation model under the asymmetric information framework. It is based on homogeneous agents with incomplete information, and is consistent with the evidence of absorbing regime switching and the recent literature on state-dependent preference. Our findings have larger implications for ine¢ ciency of Chinas stock market.

A government policy aimed at the reduction of state shares in state-owned enterprises (SOE) triggered a crash in the Chinese stock market. The sustained depression and spillover even after the policy adjustments were over constitute a puzzle---the so called "state-share paradox". The empirical study finds evidence in two dimensions. First, a regime switching model with an absorbing state suggests that government policy switches the regime to liquidity black holes. Second, there is no evidence of flight-to-liquidity during the crash, suggesting to model the crash as an aggregate phenomenon of the whole market. To carefully match the evidence, a theoretical model is set up within the framework of market microstructure. The model shows that the Chinese stock market has distinctive features of liquidity production and price discovery. The irregularities generate an inverted-S demand curve, gives rise to potential liquidity black holes, and are key features to explain the state-share paradox. This study contributes a rational panics hypothesis to the literature. The rational panics hypothesis is neither a herding model with or without behavioral assumptions, nor a standard rational expectation model under the asymmetric information framework. It is based on homogeneous agents with incomplete information, and is consistent with the evidence of absorbing regime switching and the recent literature on state-dependent preference. Our findings have larger implications for theoretical modeling and policy design.

In a real options and game-theoretic framework, this paper examines the optimal R&D investment timing of an incumbent under uncertainty, which faces the threat of preemption by a potential entrant. We incorporate incomplete information into the model by assuming that the incumbent does not know the entrant’s investment timing but know its distribution. We find that incomplete information reduces the erosion of waiting option value by the competition, and therefore waiting is still valuable even in the presence of preemption and competition. The entrant's hazard rate has the impact on the incumbent's optimal investment timing: the more the hazard rate is, the earlier the incumbent invests.