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Rational Transparency Choice in Financial Market Equilibrium¤

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  • Muendler, Marc-Andreas

Abstract

Add a stage of signal acquisition to a canonical model of portfolio choice.Under fully revealing asset price, investors' information demand reflects their choice of transparency. In reducing uncertainty, financial transparency raises expected asset price and thus benefits holders of the risky asset. At a natural transparency limit, however, investors pay to inhibit further disclosure in order to forestall the erosion of the asset's expected excess return. The natural transparency limit varies with the portfolio position. There is a dominant investor with a risky asset endowment modestly above market average who single-handedly determines transparency in equilibrium. The dominant investor strictly improves welfare for investors with similar endowments but strictly reduces welfare for others when acquiring signals beyond their natural transparency limits. The welfare consequences of financial transparency are thus intricately linked to the wealth distribution.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt73h8z1hd.

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Date of creation: 01 Dec 2005
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Handle: RePEc:cdl:ucsdec:qt73h8z1hd

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Related research

Keywords: Information acquisition; rational expectations equilibrium; fully revealing asset price; ¯nancial transparency; disclosure; gamma distributed asset returns; Poisson distributed signals;

References

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  1. Heston, Steven L, 1993. " Invisible Parameters in Option Prices," Journal of Finance, American Finance Association, vol. 48(3), pages 933-47, July.
  2. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
  3. Cripps, Martin & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," Discussion Papers in Economics 4, University of Munich, Department of Economics.
  4. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  5. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
  6. Giuseppe Moscarini & Lones Smith, 2001. "The Optimal Level of Experimentation," Econometrica, Econometric Society, vol. 69(6), pages 1629-1644, November.
  7. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  8. Muendler, Marc-Andreas, 2005. "The Action Value of Information and the Natural Transparency Limit¤," University of California at San Diego, Economics Working Paper Series qt6qb079x5, Department of Economics, UC San Diego.
  9. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  10. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-94, September.
  11. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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