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Information aggregation in a financial market with general signal structure

Author

Listed:
  • Lou, Youcheng
  • Parsa, Sahar
  • Ray, Debraj
  • Li, Duan
  • Wang, Shouyang

Abstract

We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes.

Suggested Citation

  • Lou, Youcheng & Parsa, Sahar & Ray, Debraj & Li, Duan & Wang, Shouyang, 2019. "Information aggregation in a financial market with general signal structure," Journal of Economic Theory, Elsevier, vol. 183(C), pages 594-624.
    • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:594-624
    DOI: 10.1016/j.jet.2019.05.004
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    Cited by:

    1. Lou, Youcheng & Wang, Shouyang, 2020. "A new approach to the existence and regularity of linear equilibrium in a noisy rational expectations economy," Journal of Mathematical Economics, Elsevier, vol. 90(C), pages 119-126.
    2. Holden, Tom D., 2022. "Robust real rate rules," Discussion Papers 42/2022, Deutsche Bundesbank.
    3. Lou, Youcheng & Yang, Yaqing, 2023. "Information linkages in a financial market with imperfect competition," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).
    4. Han, Jinhui & Ma, Guiyuan & Yam, Sheung Chi Phillip, 2022. "Relative performance evaluation for dynamic contracts in a large competitive market," European Journal of Operational Research, Elsevier, vol. 302(2), pages 768-780.
    5. Heumann, Tibor, 2021. "Efficiency in trading markets with multi-dimensional signals," Journal of Economic Theory, Elsevier, vol. 191(C).
    6. Lou, Youcheng & Wang, Shouyang, 2021. "The equivalence of two rational expectations equilibrium economies with different approaches to processing neighbors’ information," Mathematical Social Sciences, Elsevier, vol. 109(C), pages 93-105.

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    More about this item

    Keywords

    Multidimensional signals; Asymmetric information; Information aggregation; Rational expectations equilibrium;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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