Costly information transmission in continuous time with implications for credit rating announcements
AbstractThis paper formulates a continuous-time information transmission model in which an altruistic sender privately observes a stochastic state variable, and incurs a communication cost when she broadcasts a message. We characterize the sender's optimal announcement strategy using an ordinary differential equation. We prove the optimality of the sender's strategies using a martingale verification argument and show that the sender's optimal strategy involves sending discrete messages. Furthermore, we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements, such as the probability of rating reversals and the expected time before a rating change.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 36 (2012)
Issue (Month): 9 ()
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Web page: http://www.elsevier.com/locate/jedc
Dynamic information transmission; Costly talk; Credit rating announcement;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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