Privileged information exacerbates market volatility
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 is obtained 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 is obtained 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.
|Date of creation:||Oct 2011|
|Publication status:||Published in Documents de travail du Centre d'Economie de la Sorbonne 2011.61 - ISSN : 1955-611X. 2011|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00639813|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nimark, Kristoffer, 2008.
"Dynamic pricing and imperfect common knowledge,"
Journal of Monetary Economics,
Elsevier, vol. 55(2), pages 365-382, March.
- Jansen, David-Jan & de Haan, Jakob, 2007.
"Were verbal efforts to support the euro effective? A high-frequency analysis of ECB statements,"
European Journal of Political Economy,
Elsevier, vol. 23(1), pages 245-259, March.
- David-Jan Jansen & Jakob de Haan, 2005. "Were Verbal Efforts to Support the Euro Effective? A High-Frequency Analysis of ECB Statements," DNB Working Papers 033, Netherlands Central Bank, Research Department.
- Jean-Michel Grandmont, 1997.
"Expectations Formation and Stability of Large Socioeconomic Systems,"
97-27, Centre de Recherche en Economie et Statistique.
- Jean-Michel Grandmont, 1998. "Expectations Formation and Stability of Large Socioeconomic Systems," Econometrica, Econometric Society, vol. 66(4), pages 741-782, July.
- GRANDMONT, Jean-Michel, 1997. "Expectations formation and stability of large socioeconomic systems," CORE Discussion Papers 1997088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Grandmont, Jean-Michel, 1994. "Expectations formation and stability of large socioeconomic systems," CEPREMAP Working Papers (Couverture Orange) 9424, CEPREMAP.
- Nir Jaimovich & Sergio Rebelo, 2006.
"Can News About the Future Drive the Business Cycle?,"
2006 Meeting Papers
31, Society for Economic Dynamics.
- Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
- Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
- Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
- DeGennaro, Ramon P. & Shrieves, Ronald E., 1997. "Public information releases, private information arrival and volatility in the foreign exchange market," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 295-315, December.
- Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-1050, July.
- Christian Hellwig, "undated". "Monetary Business Cycle Models: Imperfect Information (Review Article, March 2006)," UCLA Economics Online Papers 377, UCLA Department of Economics.
- Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00639813. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.