The Existence of Informationally Efficient Markets When Individuals Are Rational
A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price-contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating functions, this paper shows that individual investors en- dowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the ex- pected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without informa- tion acquisition are Pareto efficient.
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