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Noise and Aggregation of Information in Large Markets

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Author Info
Diego García
Branko Urosevic
Abstract

We study a novel class of noisy rational expectations equilibria in markets with large number of agents. We show that, as long as noise increases with the number of agents in the economy, the limiting competitive equilibrium is well-defined and leads to non-trivial information acquisition, perfect information aggregation, and partially revealing prices, even if per capita noise tends to zero. We find that in such equilibrium risk sharing and price revelation play di erent roles than in the standard limiting economy in which per capita noise is not negligible. We apply our model to study information sales by a monopolist, information acquisition in multi-asset markets, and derivatives trading. The limiting equilibria are shown to be perfectly competitive, even when a strategic solution concept is used.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 785.

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Date of creation: Oct 2004
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Handle: RePEc:upf:upfgen:785

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Related research
Keywords: Partially revealing equilibria; competitive equilibrium; rational expectations; information acquisition; markets for information; derivatives trading; multi-asset markets; share auctions;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

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    Other versions:
  5. Alan D. Morrison & Nir Vulcan, 2003. "Making Money out of Publicly Available Information," The Centre for Market and Public Organisation 03/065, Department of Economics, University of Bristol, UK. [Downloadable!]
    Other versions:
  6. Jackson, Matthew O. & Kremer, Ilan, 2004. "The relationship between the allocation of goods and a seller's revenue," Journal of Mathematical Economics, Elsevier, vol. 40(3-4), pages 371-392, June. [Downloadable!] (restricted)
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    Other versions:
  15. 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. [Downloadable!] (restricted)
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  17. 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.
  18. Brennan, Michael J & Cao, H Henry, 1996. "Information, Trade, and Derivative Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 163-208. [Downloadable!] (restricted)
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  21. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May. [Downloadable!] (restricted)
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  24. Cao, H Henry, 1999. "The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 131-63.
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  26. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December. [Downloadable!] (restricted)
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