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Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity

  • Manzano, Carolina
  • Vives, Xavier

We study a general static noisy rational expectations model where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust. JEL Classification: D82, D83, G14 Keywords: Rational expectations equilibrium, asymmetric information, risk exposure, hedging, supply information, information acquisition.

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Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/151544.

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Date of creation: 2010
Date of revision:
Handle: RePEc:urv:wpaper:2072/151544
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  1. Vives, X., 1988. "Nash Equilibrium With Strategic Complementarities," UFAE and IAE Working Papers 107-88, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 360, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc.
  4. Jean-Pierre Danthine & Serge Moresi, 1990. "Volatility, Information and Noise Trading," CEPR Financial Markets Paper 0010, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  5. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-17, July.
  6. Laura Veldkamp, 2003. "Media Frenzies in Markets for Financial Information," Working Papers 03-20, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Christian Hellwig & Laura Veldkamp, 2006. "Knowing what others Know: Coordination motives in information acquisition," 2006 Meeting Papers 361, Society for Economic Dynamics.
  8. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  9. Laura Veldkamp, 2004. "Information Markets and the Comovement of Asset Prices," Working Papers 04-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Federico Echenique, 2002. "Comparative Statics by Adaptive Dynamics and the Correspondence Principle," Econometrica, Econometric Society, vol. 70(2), pages 833-844, March.
  11. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  12. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
  13. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December.
  14. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  15. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 866 - 907.
  16. Chamley, Christophe, 2007. "Complementarities in information acquisition with short-term trades," Theoretical Economics, Econometric Society, vol. 2(4), December.
  17. repec:ebl:ecbull:v:30:y:2010:i:1:p:383-391 is not listed on IDEAS
  18. Christophe Chamley, 2008. "On "Acquisition of Information in Financial Markets"," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1081-1084.
  19. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  20. Medrano, Luis Angel & Vives, Xavier, 2002. "Regulating Insider Trading when Investment Matters," CEPR Discussion Papers 3292, C.E.P.R. Discussion Papers.
  21. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, 03.
  22. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2010. "Learning and Complementarities: Implications for Speculative Attacks," CEPR Discussion Papers 7651, C.E.P.R. Discussion Papers.
  23. Blume, L. E. & Bray, M. M. & Easley, D., 1982. "Introduction to the stability of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 313-317, April.
  24. Vives, Xavier, 1995. "Short-Term Investment and the Informational Efficiency of the Market," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 125-60.
  25. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  26. Gadi Barlevy & Pietro Veronesi, 2007. "Information acquisition in financial markets: a correction," Working Paper Series WP-07-06, Federal Reserve Bank of Chicago.
  27. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  28. Xavier Vives, 2007. "Information and Learning in Markets," Levine's Bibliography 122247000000001520, UCLA Department of Economics.
  29. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 263-292.
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