Privileged Information Exacerbates Market Volatility
AbstractWe study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability obtains when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability obtains when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1
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Bibliographic InfoPaper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2011-14.
Date of creation: May 2011
Date of revision:
Asymmetric Information; Common Knowledge; Eductive Learning; Rational Expectations; Rationalizability; Volatility;
Other versions of this item:
- Gabriel Desgranges & Stéphane Gauthier, 2011. "Privileged information exacerbates market volatility," Documents de travail du Centre d'Economie de la Sorbonne 11061, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Gabriel Desgranges & Stéphane Gauthier, 2011. "Privileged information exacerbates market volatility," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00639813, HAL.
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-22 (All new papers)
- NEP-CTA-2012-05-22 (Contract Theory & Applications)
- NEP-FOR-2012-05-22 (Forecasting)
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