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Crises and Prices: Information Aggregation, Multiplicity and Volatility

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  • Ivan Werning
  • George-Marios Angeletos

    ()
    (Department of Economics Massachusetts Institute of Technology)

Abstract

Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally. (JEL D53, D82, D83)

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 284.

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Date of creation: 2005
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Handle: RePEc:red:sed005:284

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Keywords: multiple equilibria; coordination; global games; speculative attacks;

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