In this paper, we present an asymmetric information model of financial markets where traders are uncertain not only about fundamentals, but also about the composition of informed and noise traders in the market. Hedge fund managers use prices to update their beliefs about these uncertainties. The model generates a non-linear equilibrium, where price reacts asymmetrically to positive/negative news. Extreme news leads to higher uncertainty about fundamentals and lower price informativeness, while increased uncertainty about the market composition implies a lower perceived belief dispersion between traders, and higher expected returns. We study the model's behaviour under various distributional assumptions about the prior beliefs of agents, verify it fits well with many stylized facts about the volume-price relationship and extend to a dynamic model to discuss the return dynamics.
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