Multiple Equilibria in Noisy Rational Expectations Economies

Domotor Palvolgyi, Gyuri Venter

Research output: Contribution to conferencePaperResearchpeer-review

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 languageEnglish
Publication date2016
Number of pages57
Publication statusPublished - 2016
EventThe 43rd European Finance Association Annual Meeting (EFA 2016) - BI Norwegian Business School, Oslo, Norway
Duration: 17 Aug 201620 Aug 2016
Conference number: 43
http://www.efa2016.org/

Conference

ConferenceThe 43rd European Finance Association Annual Meeting (EFA 2016)
Number43
LocationBI Norwegian Business School
CountryNorway
CityOslo
Period17/08/201620/08/2016
Internet address

Keywords

  • Asymmetric information
  • Noisy rational expectations
  • Grossman-Stiglitz
  • Equilibrium multiplicity

Cite this

Palvolgyi, D., & Venter, G. (2016). Multiple Equilibria in Noisy Rational Expectations Economies. Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway.
Palvolgyi, Domotor ; Venter, Gyuri. / Multiple Equilibria in Noisy Rational Expectations Economies. Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway.57 p.
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Palvolgyi, D & Venter, G 2016, 'Multiple Equilibria in Noisy Rational Expectations Economies' Paper presented at, Oslo, Norway, 17/08/2016 - 20/08/2016, .

Multiple Equilibria in Noisy Rational Expectations Economies. / Palvolgyi, Domotor; Venter, Gyuri.

2016. Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway.

Research output: Contribution to conferencePaperResearchpeer-review

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AB - 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).

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Palvolgyi D, Venter G. Multiple Equilibria in Noisy Rational Expectations Economies. 2016. Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway.