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Competitive rational expectations equilibria without apology

  • Kovalenkov, Alexander
  • Vives, Xavier

Consider a financial market with N risk-averse asymmetrically informed traders. When N grows at the same rate as noise trading, prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1/N. Equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk-bearing capacity. Both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1/N. The results extend to endogenous information acquisition and the connections with the Grossman–Stiglitz paradox are highlighted.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 211-235

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:211-235
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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