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Privileged Information Exacerbates Market Volatility

Author

Listed:
  • Gabriel Desgranges

    (THEMA)

  • Stéphane Gauthier

    (CREST)

Abstract

We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability obtains when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability obtains when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1

Suggested Citation

  • Gabriel Desgranges & Stéphane Gauthier, 2011. "Privileged Information Exacerbates Market Volatility," Working Papers 2011-14, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2011-14
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asymmetric Information; Common Knowledge; Eductive Learning; Rational Expectations; Rationalizability; Volatility;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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