Multiple Equilibria in Noisy Rational Expectations Economies

Dömötör Pálvölgyi, 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 date2017
Number of pages56
Publication statusPublished - 2017
EventThe 77th Annual Meeting of American Finance Association. AFA 2017 - Sheraton Grand Chicago, Chicago, United States
Duration: 6 Jan 20178 Jan 2017
Conference number: 77
http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html

Conference

ConferenceThe 77th Annual Meeting of American Finance Association. AFA 2017
Number77
LocationSheraton Grand Chicago
CountryUnited States
CityChicago
Period06/01/201708/01/2017
Internet address

Keywords

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

Cite this

Pálvölgyi, D., & Venter, G. (2017). Multiple Equilibria in Noisy Rational Expectations Economies. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.
Pálvölgyi, Dömötör ; Venter, Gyuri. / Multiple Equilibria in Noisy Rational Expectations Economies. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.56 p.
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Pálvölgyi, D & Venter, G 2017, 'Multiple Equilibria in Noisy Rational Expectations Economies' Paper presented at, Chicago, United States, 06/01/2017 - 08/01/2017, .

Multiple Equilibria in Noisy Rational Expectations Economies. / Pálvölgyi, Dömötör; Venter, Gyuri.

2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.

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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KW - Equilibrium multiplicity

M3 - Paper

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Pálvölgyi D, Venter G. Multiple Equilibria in Noisy Rational Expectations Economies. 2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.