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Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity

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  • Manzano, Carolina

    (Universitat Rovira i Virgili)

  • Vives, Xavier

    () (IESE Business School)

Abstract

We study a general static noisy rational expectations model, where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/874.

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Length: 44 pages
Date of creation: 23 Jul 2010
Date of revision:
Handle: RePEc:ebg:iesewp:d-0874

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: Rational expectations equilibrium; strategic complementarity; multiplicity of equilibria; asymmetric information; risk exposure; hedging; supply information;

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References

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  1. Federico Echenique, 2000. "Comparative Statics by Adaptive Dynamics and The Correspondence Principle," GE, Growth, Math methods 9912002, EconWPA.
  2. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Chamley, Christophe, 2007. "Complementarities in information acquisition with short-term trades," Theoretical Economics, Econometric Society, vol. 2(4), December.
  4. Gadi Barlevy & Pietro Veronesi, 2007. "Information acquisition in financial markets: a correction," Working Paper Series WP-07-06, Federal Reserve Bank of Chicago.
  5. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Learning and Complementarities: Implications for Speculative Attacks," CEPR Discussion Papers 7651, C.E.P.R. Discussion Papers.
  6. Danthine, Jean-Pierre & Moresi, Serge, 1993. "Volatility, information and noise trading," European Economic Review, Elsevier, vol. 37(5), pages 961-982, June.
  7. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December.
  8. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, 03.
  9. Laura L. Veldkamp, 2006. "Media Frenzies in Markets for Financial Information," American Economic Review, American Economic Association, vol. 96(3), pages 577-601, June.
  10. Manuel Amador & Pierre-Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," NBER Working Papers 14255, National Bureau of Economic Research, Inc.
  11. Christophe Chamley, 2008. "On "Acquisition of Information in Financial Markets"," Review of Economic Studies, Wiley Blackwell, vol. 75(4), pages 1081-1084, October.
  12. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 484, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. Medrano, Luis Angel & Vives, Xavier, 2002. "Regulating Insider Trading when Investment Matters," CEPR Discussion Papers 3292, C.E.P.R. Discussion Papers.
  14. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  15. Laura L. Veldkamp, 2006. "Information Markets and the Comovement of Asset Prices," Review of Economic Studies, Wiley Blackwell, vol. 73(3), pages 823-845, 07.
  16. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  18. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
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  21. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-17, July.
  22. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
  23. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  24. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 313-317, April.
  25. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  26. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 263-292.
  27. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  28. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Wiley Blackwell, vol. 76(1), pages 223-251, 01.
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Citations

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Cited by:
  1. Yu-Fu Chen & Michael Funke, 2010. "Global Warming and Extreme Events: Rethinking the Timing and Intensity of Environmental Policy," CESifo Working Paper Series 3139, CESifo Group Munich.
  2. Giovanni Cespa & Xavier Vives, 2008. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," CSEF Working Papers 191, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Larson, Nathan, 2011. "Clustering on the same news sources in an asset market," MPRA Paper 32823, University Library of Munich, Germany.

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