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Existence and regularity of partially revealing rational expectations equilibrium in finite economies

Author

Listed:
  • Alessandro Citanna

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Antonio Villanacci

Abstract

We consider an incomplete financial market exchange economy with nominal assets and a finite number of traders, goods, states and signals. In this framework, we prove the existence and regularity of rational expectations equilibria for any informational structure derived from prices. We provide a proof that completes the characterization of existence of equilibrium in these economies, in the following sense: while Polemarchakis and Siconolfi [Polemarchakis, H., Siconolfi, P., 1993. Asset markets and the information revealed by prices. Economic Theory, Vol. 3, pp. 645–661.] show existence only of fully nonrevealing equilibrium, and Rahi [Rahi, R., 1995. Partially revealing rational expectations equilibria with nominal assets. Journal of Mathematical Economics, Vol. 24, pp. 137–146.] finds partially revealing equilibria for all economies satisfying a restrictive condition on the traders' equilibrium information structure, we dispense with Rahi's condition, and offer a strategy of proof that applies directly to all cases of revelation. Our proof of existence is based on homotopy methods. Given the way we construct our proof, we can easily link the asymmetric information model to the linear restricted participation models. We show how to apply the "Cass trick" in asymmetric information economies to control for asset prices, even if all agents are restricted, that is, partially informed.

Suggested Citation

  • Alessandro Citanna & Antonio Villanacci, 2000. "Existence and regularity of partially revealing rational expectations equilibrium in finite economies," Post-Print hal-00463207, HAL.
    • Handle: RePEc:hal:journl:hal-00463207
    DOI: 10.1016/S0304-4068(99)00042-7
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    Citations

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    Cited by:

    1. Le Van, Cuong & Navrouzoglou, Paulina & Vailakis, Yiannis, 2019. "On endogenous formation of price expectations," Games and Economic Behavior, Elsevier, vol. 115(C), pages 436-458.
    2. Marc-Andreas Muendler, 2004. "The Existence of Informationally Efficient Markets When Individuals Are Rational," CESifo Working Paper Series 1295, CESifo.
    3. McSweeney, Brendan, 2009. "The roles of financial asset market failure denial and the economic crisis: Reflections on accounting and financial theories and practices," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 835-848, August.
    4. Muendler, Marc-Andreas, 2005. "Rational Information Choice in Financial Market Equilibrium," University of California at San Diego, Economics Working Paper Series qt5q4764nj, Department of Economics, UC San Diego.
    5. Muendler, Marc-Andreas, 2007. "The possibility of informationally efficient markets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 467-483, March.
    6. Feess, Eberhard & Wohlschlegel, Ansgar, 2006. "Liability and information transmission: The advantage of negligence based rules," Economics Letters, Elsevier, vol. 92(1), pages 63-67, July.
    7. Pietra, Tito & Siconolfi, Paolo, 2008. "Trade and revelation of information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 132-164, January.
    8. Donati, Paola & Momi, Takeshi, 2003. "Indeterminacy of rational expectations equilibria in sequential financial markets," Journal of Mathematical Economics, Elsevier, vol. 39(7), pages 743-762, September.

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