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Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity

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  • Manzano, Carolina
  • Vives, Xavier

Abstract

We study a general static noisy rational expectations model where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 47 (2011)
Issue (Month): 3 ()
Pages: 346-369

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Handle: RePEc:eee:mateco:v:47:y:2011:i:3:p:346-369

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Rational expectations equilibrium; Asymmetric information; Risk exposure; Hedging; Supply information; Information acquisition;

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References

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  1. Luis Angel Medrano & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, Springer, vol. 8(2), pages 199-277.
  2. Laura Veldkamp, 2004. "Information Markets and the Comovement of Asset Prices," 2004 Meeting Papers 539, Society for Economic Dynamics.
  3. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 866 - 907.
  4. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
  6. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 313-317, April.
  7. Jean-Pierre DANTHINE & Serge MORESI, 1990. "Volatility, Information, and Noise Trading," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9015, Université de Lausanne, Faculté des HEC, DEEP.
  8. Christian Hellwig & Laura Veldkamp, 2006. "Knowing what others Know: Coordination motives in information acquisition," 2006 Meeting Papers 361, Society for Economic Dynamics.
  9. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 263-292.
  10. Hua He and Jiang Wang., 1993. "Differential Information and Dynamic Behavior of Stock Trading Volume," Research Program in Finance Working Papers RPF-228, University of California at Berkeley.
  11. Christophe Chamley, 2008. "On "Acquisition of Information in Financial Markets"," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1081-1084.
  12. Laura Veldkamp, 2003. "Media Frenzies in Markets for Financial Information," Working Papers 03-20, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. Federico Echenique, 1999. "Comparative Statics by Adaptative Dynamics and the Correspondence Principle," Documentos de Trabajo (working papers) 2099, Department of Economics - dECON.
  14. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-17, July.
  15. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 360, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  16. Xavier Vives, 1994. "Short-term Investment and the Informational Efficiency of the Market," CEPR Financial Markets Paper 0034, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  17. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  18. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  19. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December.
  20. Gadi Barlevy & Pietro Veronesi, 2007. "Information acquisition in financial markets: a correction," Working Paper Series WP-07-06, Federal Reserve Bank of Chicago.
  21. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March.
  22. Vives, X., 1988. "Nash Equilibrium With Strategic Complementarities," UFAE and IAE Working Papers 107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  23. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  24. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  25. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, 03.
  26. Chamley, Christophe, 2007. "Complementarities in information acquisition with short-term trades," Theoretical Economics, Econometric Society, vol. 2(4), December.
  27. repec:ebl:ecbull:v:30:y:2010:i:1:p:383-391 is not listed on IDEAS
  28. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
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Citations

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Cited by:
  1. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," IDEI Working Papers 769, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2014.
  2. Jess Benhabib & Pengfei Wang & Yi Wen, 2013. "Uncertainty and sentiment-driven equilibria," Working Papers 2013-011, Federal Reserve Bank of St. Louis.
  3. Giovanni Cespa & Xavier Vives, 2012. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 539-580.
  4. Larson, Nathan, 2011. "Clustering on the same news sources in an asset market," MPRA Paper 32823, University Library of Munich, Germany.
  5. Michael Funke & Yu-Fu Chen, 2010. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers 21007b, Hamburg University, Department of Economics.
  6. Hatchondo, Juan Carlos & Krusell, Per & Schneider, Martin, 2014. "Asset Trading and Valuation with Uncertain Exposure," Working Paper 14-5, Federal Reserve Bank of Richmond.
  7. May Elsayyad & Kai A. Konrad, 2010. "Fighting Multiple Tax Havens," CESifo Working Paper Series 3195, CESifo Group Munich.
  8. Alexander Kovalenkov & Xavier Vives, 2008. "Competitive Rational Expectations Equilibria without Apology," CESifo Working Paper Series 2446, CESifo Group Munich.
  9. Grégoire, Philippe & Huang, Hui, 2012. "Information disclosure with leakages," Economic Modelling, Elsevier, vol. 29(5), pages 2005-2010.

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