In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in each situation converge to each other at a rate of 1/N as the market becomes large. The approximation is particularly good when the informationally adjusted risk bearing capacity of traders is not very large. This is not the case if informed traders are close to risk neutral. Both equilibria converge to the competitive equilibrium of an idealized limit continuum economy as the market becomes large at a slower rate of 1/ãN and, therefore, the limit equilibrium need not be a good approximation of the strategic equilibrium in moderately large markets.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2446.
Find related papers by JEL classification: D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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Martin W. Cripps & Jeroen M. Swinkels, 2006.
"Efficiency of Large Double Auctions,"
Econometrica,
Econometric Society, vol. 74(1), pages 47-92, 01.
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