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Crises and Prices: Information Aggregation, Multiplicity, and Volatility

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  • Iván Werning
  • George-Marios Angeletos

Abstract

Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally. (JEL D53, D82, D83)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.96.5.1720
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 5 (December)
Pages: 1720-1736

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:5:p:1720-1736

Note: DOI: 10.1257/aer.96.5.1720
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  1. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, vol. 107(2), pages 191-222, December.
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