Abstract
This paper studies equilibrium uniqueness in standard noisy rational expectations economies with asymmetric or differential information a la Grossman and Stiglitz (1980) and Hellwig (1980). We show that the standard linear equilibrium of Grossman and Stiglitz (1980) is the unique equilibrium with a continuous price function. However, we also construct a tractable class of equilibria with discontinuous prices that have very different economic implications, including (i) jumps and crashes, (ii) significant revisions in uninformed belief due to small changes in the market price, (iii) “upward-sloping” demand curves, (iv) higher prices leading to future returns that are higher in expectation (price drift) and (v) more positively skewed. Discontinuous equilibria can be arbitrarily close to being fully-revealing. Finally, discontinuous equilibria with the same construction also exist in Hellwig (1980).
Original language | English |
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Publication date | 2016 |
Number of pages | 57 |
Publication status | Published - 2016 |
Event | The 43rd European Finance Association Annual Meeting (EFA 2016) - BI Norwegian Business School, Oslo, Norway Duration: 17 Aug 2016 → 20 Aug 2016 Conference number: 43 http://www.efa2016.org/ |
Conference
Conference | The 43rd European Finance Association Annual Meeting (EFA 2016) |
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Number | 43 |
Location | BI Norwegian Business School |
Country/Territory | Norway |
City | Oslo |
Period | 17/08/2016 → 20/08/2016 |
Internet address |
Keywords
- Asymmetric information
- Noisy rational expectations
- Grossman-Stiglitz
- Equilibrium multiplicity