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A Large-Market Rational Expectations Equilibrium Model

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  • Xavier Vives

Abstract

This paper presents a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved. The equilibrium is efficient, and the paradoxes associated with fully revealing rational expectations equilibria are precluded without resorting to noise traders. The model admits a reinterpretation in which behavioral traders coexist with rational traders, and it allows us to characterize the amount of induced mispricing.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-06/cesifo1_wp3485.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3485.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3485

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Keywords: adverse selection; information acquisition; double auction; multi-unit auctions; rate of convergence; behavioural traders; complementarities;

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References

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  1. Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-15, September.
  2. Nuno Cassola & Ali Hortacsu & Jakub Kastl, 2009. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds," NBER Working Papers 15158, National Bureau of Economic Research, Inc.
  3. Bindseil, Ulrich & Nyborg, Kjell G. & Strebulaev, Ilya A., 2004. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," University of California at Los Angeles, Anderson Graduate School of Management qt9878h0kn, Anderson Graduate School of Management, UCLA.
  4. Vives, Xavier, 2008. "Strategic Supply Function Competition with Private Information," CEPR Discussion Papers 6960, C.E.P.R. Discussion Papers.
  5. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1995. "The Loser's Curse and Information Aggregation in Common Value Auctions," Discussion Papers 1147, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
  7. Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2006. "Declining valuations and equilibrium bidding in central bank refinancing operations," Working Paper Series 0668, European Central Bank.
  8. Philip J Reny & Motty Perry, 2006. "Toward a Strategic Foundation for Rational Expectations Equilibrium," Econometrica, Econometric Society, vol. 74(5), pages 1231-1269, 09.
  9. Blume, Lawrence & Easley, David, 1990. "Implementation of Walrasian expectations equilibria," Journal of Economic Theory, Elsevier, vol. 51(1), pages 207-227, June.
  10. Mas-Colell, Andreu & Vives, Xavier, 1993. "Implementation in Economies with a Continuum of Agents," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 613-29, July.
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