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Asymmetric Information in a Competitive Market Game: Reexamining the Implications of Rational Expectations

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Author Info

  • Matthew O. Jackson

    (California Institute of Technology)

  • James Peck

    (Ohio State University)

Abstract

We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9711004.

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Length: 34 pages
Date of creation: 25 Nov 1997
Date of revision:
Handle: RePEc:wpa:wuwpmi:9711004

Note: Type of Document - postscript; prepared on pc-tex; to print on Postscript; pages: 34; figures: available from authors. comments welcome
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Web page: http://128.118.178.162

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Keywords: market game; rational expectations; excess volatility; information acquisition; efficient markets hypothesis;

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References

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  2. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 1-34, January.
  3. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  4. Milgrom, Paul R, 1979. "A Convergence Theorem for Competitive Bidding with Differential Information," Econometrica, Econometric Society, vol. 47(3), pages 679-88, May.
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  7. Jackson, Matthew & Peck, James, 1991. "Speculation and price fluctuations with private, extrinsic signals," Journal of Economic Theory, Elsevier, vol. 55(2), pages 274-295, December.
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  25. Matthew O. Jackson & James Peck, 1993. "Costly Information Acquisition," Discussion Papers 1087, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Peck, James, 2003. "Large market games with demand uncertainty," Journal of Economic Theory, Elsevier, vol. 109(2), pages 283-299, April.
  2. Muendler, Marc-Andreas, 2005. "Risk Neutral Investors Do Not Acquire Information¤," University of California at San Diego, Economics Working Paper Series qt8fg5g853, Department of Economics, UC San Diego.
  3. Christopher Chambers & Paul Healy, 2012. "Updating toward the signal," Economic Theory, Springer, vol. 50(3), pages 765-786, August.
  4. Levin, Dan & Peck, James & Ye, Lixin, 2007. "Bad news can be good news: Early dropouts in an English auction with multi-dimensional signals," Economics Letters, Elsevier, vol. 95(3), pages 462-467, June.
  5. Muendler, Marc-Andreas, 2008. "Risk-neutral investors do not acquire information," Finance Research Letters, Elsevier, vol. 5(3), pages 156-161, September.
  6. Philip Bond & Hulya Eraslan, 2007. "Information-based trade," Levine's Bibliography 122247000000001689, UCLA Department of Economics.
  7. Riekhof, Hans-Christian & Riekhof, Marie-Catherine & Brinkhoff, Stefan, 2012. "Predictive Markets: Ein vielversprechender Weg zur Verbesserung der Prognosequalität im Unternehmen?," PFH Forschungspapiere/Research Papers 2012/07, PFH Private University of Applied Sciences, Göttingen.
  8. Shorish, Jamsheed, 2006. "Functional Rational Expectations Equilibria in Market Games," Economics Series 186, Institute for Advanced Studies.
  9. Richard McLean & James Peck & Andrew Postlewaite, 2004. "On Price-Taking Behavior in Asymmetric Information Economies," PIER Working Paper Archive 04-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  10. Muendler, Marc-Andreas, 2007. "The possibility of informationally efficient markets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 467-483, March.
  11. Meirowitz, Adam, 2005. "Deliberative Democracy or Market Democracy: Designing Institutions to Aggregate Preferences and Information," Papers 03-28-2005, Princeton University, Research Program in Political Economy.

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