Competitive Rational Expectations Equilibria without Apology
AbstractIn 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 eachsituation converge to each other at a rate of 1/N as the market becomes large. Theapproximation 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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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2446.
Date of creation: 2008
Date of revision:
gschizophreniah problem; strategic equilibrium; large markets; information acquisition; free entry; rate of convergence;
Other versions of this item:
- Kovalenkov, Alex & Vives, Xavier, 2008. "Competitive Rational Expectations Equilibria Without Apology," CEPR Discussion Papers 7025, C.E.P.R. Discussion Papers.
- 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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