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Competitive rational expectations equilibria without apology

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  • Kovalenkov, Alexander
  • Vives, Xavier

Abstract

Consider a financial market with N risk-averse asymmetrically informed traders. When N grows at the same rate as noise trading, prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1/N. Equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk-bearing capacity. Both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1/N. The results extend to endogenous information acquisition and the connections with the Grossman–Stiglitz paradox are highlighted.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 211-235

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:211-235

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: “Schizophrenia” problem; Strategic equilibrium; Large markets; Information acquisition; Free entry; Rate of convergence;

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References

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Cited by:
  1. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
  2. Pasquariello, Paolo, 2014. "Prospect Theory and market quality," Journal of Economic Theory, Elsevier, vol. 149(C), pages 276-310.

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