This paper takes a step towards assessing the importance of the role of prices as signals of aggregate information, by developing an approach to estimating primitive parameters of a noisy rational expectations model under perfect competition, when both prices and terminal values are observable. We show that the equilibrium variance-covariance parameters int eh Hellwig(1980) model can be inverted to obtain values of the primitive parameters. This lets us identify the MLE of the precision of private information, and provides, conditional on a level of risk aversion, the MLE of the variance of exogenous supply noise. Using data from three currency futures markets we then present estimates of the primitive parameters, of the signal-to-noise ratio, of weights that agents place on different sources of information,and of coefficients in the linear price conjecture.
We find that the variance of exogenous supply is generally several orders of magnitude larger than the variance of the error term in agens' private signals. Despite the level of noise being high, since the quality of private signals is also high, agents appear to rely more on the aggregated information in price than on their own priors, but the market as a whole seems to place more weight on priors than on the aggregate private information of agents.