Information and Market Equilibrium
Under the assumption of complete markets, a fundamental result of competitive market analysis (whether for speculative or commodity markets) is that prices contain all information necessary for optimal decisionmaking by individual economic units. The role that prices play in disseminating information is analyzed in the context of two different models. First an economy under uncertainty without complete markets is analyzed. Conditions are specified under which equilibrium prices reflect (or transmit) all available information to market observers. It is shown that uninformed market observers can deduce inside information about the environment from the change in the equilibrium price when there is a one-to-one correspondence between the market price and the useful part of the information received. For a special case, sufficient conditions for invertibility are derived. Then a Bayesian hypothesis is used to study the price expectations formed on the basis of information obtained about the economy from observations of past market prices. The Bayesian price expectations are shown to converge, as price observations accumulate, to the expectations of an observer who knows the true structure of the economy.
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): 6 (1975)
Issue (Month): 1 (Spring)
|Contact details of provider:|| Web page: http://www.rje.org|
|Order Information:||Web: https://editorialexpress.com/cgi-bin/rje_online.cgi|