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

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  • Manzano, Carolina
  • Vives, Xavier

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. JEL Classification: D82, D83, G14 Keywords: Rational expectations equilibrium, asymmetric information, risk exposure, hedging, supply information, information acquisition.

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Bibliographic Info

Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/151544.

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Date of creation: 2010
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Handle: RePEc:urv:wpaper:2072/151544

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Keywords: Expectatives racionals (Teoria econòmica); Equilibri (Economia); Cobertura del risc; Mercat eficient; 336 - Finances. Banca. Moneda. Borsa;

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  4. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
  5. Vives, Xavier, 1995. "Short-Term Investment and the Informational Efficiency of the Market," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(1), pages 125-60.
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Citations

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Cited by:
  1. Kovalenkov, Alexander & Vives, Xavier, 2014. "Competitive rational expectations equilibria without apology," Journal of Economic Theory, Elsevier, Elsevier, vol. 149(C), pages 211-235.
  2. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," Les Cahiers de Recherche 968, HEC Paris.
  3. Hatchondo, Juan Carlos & Krusell, Per & Schneider, Martin, 2014. "Asset Trading and Valuation with Uncertain Exposure," Working Paper, Federal Reserve Bank of Richmond 14-5, Federal Reserve Bank of Richmond.
  4. Elsayyad, May & Konrad, Kai A., 2012. "Fighting Multiple Tax Havens," Munich Reprints in Economics, University of Munich, Department of Economics 13964, University of Munich, Department of Economics.
  5. Michael Funke & Yu-Fu Chen, 2010. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21007b, Hamburg University, Department of Economics.
  6. Jess Benhabib & Pengfei Wang & Yi Wen, 2013. "Uncertainty and sentiment-driven equilibria," Working Papers, Federal Reserve Bank of St. Louis 2013-011, Federal Reserve Bank of St. Louis.
  7. Larson, Nathan, 2011. "Clustering on the same news sources in an asset market," MPRA Paper 32823, University Library of Munich, Germany.
  8. Grégoire, Philippe & Huang, Hui, 2012. "Information disclosure with leakages," Economic Modelling, Elsevier, Elsevier, vol. 29(5), pages 2005-2010.
  9. Giovanni Cespa & Xavier Vives, 2008. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 191, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-48, Scottish Institute for Research in Economics (SIRE).

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