Costly information transmission in continuous time with implications for credit rating announcements
This paper formulates a continuous-time information transmission model in which an altruistic sender privately observes a stochastic state variable, and incurs a communication cost when she broadcasts a message. We characterize the sender's optimal announcement strategy using an ordinary differential equation. We prove the optimality of the sender's strategies using a martingale verification argument and show that the sender's optimal strategy involves sending discrete messages. Furthermore, we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements, such as the probability of rating reversals and the expected time before a rating change.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 36 (2012)
Issue (Month): 9 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/jedc|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Austen-Smith, David, 1994. "Strategic Transmission of Costly Information," Econometrica, Econometric Society, vol. 62(4), pages 955-963, July.
- Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-781, July.
- Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-752, June.
- Lockwood, Ben, 1996. "Uniqueness of Markov-perfect equilibrium in infinite-time affine-quadratic differential games," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 751-765, May.
- Doraszelski, Ulrich & Escobar, Juan, 2010.
"A theory of regular Markov perfect equilibria in dynamic stochastic games: genericity, stability, and purification,"
Econometric Society, vol. 5(3), September.
- Juan Escobar & Ulrich Doraszelski, 2008. "A Theory of Regular Markov Perfect Equilibria\\in Dynamic Stochastic Games: Genericity, Stability, and Purification," 2008 Meeting Papers 453, Society for Economic Dynamics.
- Doraszelski, Ulrich & Escobar, Juan, 2008. "A Theory of Regular Markov Perfect Equilibria in Dynamic Stochastic Games: Genericity, Stability, and Purification," CEPR Discussion Papers 6805, C.E.P.R. Discussion Papers.
- Hefei Wang, 2009. "Reputation acquisition of underwriter analysts - Theory and evidence," Journal of Applied Economics, Universidad del CEMA, vol. 12, pages 331-363, November.
- Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
- Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers 1242, Cowles Foundation for Research in Economics, Yale University.
- Navin Kartik, 2009. "Strategic Communication with Lying Costs," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1359-1395.
- Navin Kartik, 2008. "Strategic Communication with Lying Costs," 2008 Meeting Papers 350, Society for Economic Dynamics.
- Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November.
- Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
- Rowat, Colin, 2007. "Non-linear strategies in a linear quadratic differential game," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3179-3202, October.
- Colin Rowat, 2005. "Non-linear strategies in a linear quadratic differential game," GE, Growth, Math methods 0502001, EconWPA.
- Colin Rowat, 2005. "Non-Linear Strategies in a Linear Quadratic Differential Game," Discussion Papers 05-05, Department of Economics, University of Birmingham.
- Joel Sobel, 1985. "A Theory of Credibility," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 557-573.
- Rincon-Zapatero, J. P., 2004. "Characterization of Markovian equilibria in a class of differential games," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1243-1266, April.
- Austen-Smith, David & Banks, Jeffrey S., 2000. "Cheap Talk and Burned Money," Journal of Economic Theory, Elsevier, vol. 91(1), pages 1-16, March.
- David Austen-Smith & Jeffrey S. Banks, 1998. "Cheap Talk and Burned Money," Discussion Papers 1245, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
- Martin-Herran, G. & Rincon-Zapatero, J.P., 2005. "Efficient Markov perfect Nash equilibria: theory and application to dynamic fishery games," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1073-1096, June.
- Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
- Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
- V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
- Anat R. Admati & Paul Pfleiderer, 2004. "Broadcasting Opinions with an Overconfident Sender," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 467-498, 05. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:36:y:2012:i:9:p:1402-1413. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.