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Information revelation in a security market: The impact of uncertain participation

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  • Gabrielle Demange

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

The paper analyzes how uncertainty on traders' participation affects a competitive security market in which there are some informed traders. We show that discontinuities, or "crashes", can arise at equilibrium, even when no investor posts a priori an increasing demand. Because of uncertain participation, the precision of the information brought by a price is endogenous, affected by the size of the trades. As a result, two prices with different volumes and information revelation may clear the market for the same values of the fundamentals. At one price, insurance motives drive the exchanges, noise is large and little information is revealed. At another price, uninformed trades are small, which makes the clearing price much more informative. This multiplicity of prices with different precision of information generates discontinuities.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00575046.

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Date of creation: Nov 2009
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Handle: RePEc:hal:psewpa:halshs-00575046

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00575046
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Keywords: rational expectations equilibrium ; asymmetric information ; crashes;

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