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The Existence of Informationally Efficient Markets When Individuals Are Rational

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  • Marc-Andreas Muendler

Abstract

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 endowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the expected 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 information acquisition are Pareto efficient.

Suggested Citation

  • Marc-Andreas Muendler, 2004. "The Existence of Informationally Efficient Markets When Individuals Are Rational," CESifo Working Paper Series 1295, CESifo.
    • Handle: RePEc:ces:ceswps:_1295
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    References listed on IDEAS

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    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    2. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 79-90.
    3. Jordan, J S, 1983. "On the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 51(5), pages 1325-1343, September.
    4. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
    5. Romer, David, 1993. "Rational Asset-Price Movements without News," American Economic Review, American Economic Association, vol. 83(5), pages 1112-1130, December.
    6. Jackson, Matthew O, 1991. "Equilibrium, Price Formation, and the Value of Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 1-16.
    7. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
    8. Routledge, Bryan R, 1999. "Adaptive Learning in Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1165-1202.
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    Cited by:

    1. Marc-Andreas Muendler, 2005. "Rational Information Choice in Financial Market Equilibrium," CESifo Working Paper Series 1436, CESifo.
    2. repec:cdl:ucsdec:qt5q4764nj is not listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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