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Noise and aggregation of information in large markets

  • Diego García
  • Branko Urosevic
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    We study a novel class of noisy rational expectations equilibria in markets with large number of agents. We show that, as long as noise increases with the number of agents in the economy, the limiting competitive equilibrium is well-defined and leads to non-trivial information acquisition, perfect information aggregation, and partially revealing prices, even if per capita noise tends to zero. We find that in such equilibrium risk sharing and price revelation play di erent roles than in the standard limiting economy in which per capita noise is not negligible. We apply our model to study information sales by a monopolist, information acquisition in multi-asset markets, and derivatives trading. The limiting equilibria are shown to be perfectly competitive, even when a strategic solution concept is used.

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    File URL: http://www.econ.upf.edu/docs/papers/downloads/785.pdf
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    Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 785.

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    Date of creation: Oct 2004
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    Handle: RePEc:upf:upfgen:785
    Contact details of provider: Web page: http://www.econ.upf.edu/

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    19. Cao, H Henry, 1999. "The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 131-63.
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