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Complementarities in Information Acquisition with Short-Term Trades

  • Christophe Chamley


    (Institute for Economic Development, Boston University)

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    In a financial market where agents trade for prices in the short-term and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and a continuum of equilibrium strategies if the cost of information is sufficient small. Imperfect observation of the past prices reduces the continuum of Nash-equilibrium to a unique one which may be a Strongly Rational-Expectations Equilibrium. In that equilibrium, because of the strategic complementarity, there are two sharply different regimes for the evolution of the price, the volume of trade and the information acquisition which is either nil or at its maximum.

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    Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-156.

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    Length: 37 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:bos:iedwpr:dp-156
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    1. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
    2. Detemple, Jerome B., 1991. "Further results on asset pricing with incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 425-453, July.
    3. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    4. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
    5. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    7. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, October.
    8. LOVO, Stefano & DECAMPS, Jean-Paul, 2002. "Risk aversion and herd behavior in financial markets," Les Cahiers de Recherche 758, HEC Paris.
    9. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    10. Hirshleifer, David & Teoh, Siew Hong, 2001. "Herd Behavior and Cascading in Capital Markets: A Review and Synthesis," MPRA Paper 5186, University Library of Munich, Germany.
    11. David, Alexander, 1997. "Fluctuating Confidence in Stock Markets: Implications for Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 427-462, December.
    12. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
    13. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
    14. Barlevy, Gadi & Veronesi, Pietro, 2000. "Information Acquisition in Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 79-90, January.
    15. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
    16. Hau, Harald, 1998. "Competitive Entry and Endogenous Risk in the Foreign Exchange Market," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 757-87.
    17. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, October.
    18. Maria Grazia Romano, 2007. "Learning, Cascades, and Transaction Costs," Review of Finance, European Finance Association, vol. 11(3), pages 527-560.
    19. repec:tpr:qjecon:v:103:y:1988:i:3:p:441-63 is not listed on IDEAS
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