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Asymmetric Information in a Competitive Market Game: Reexamining the Implications of Rational Expectations

Author Info

Listed author(s):
  • Matthew O. Jackson

    (California Institute of Technology)

  • James Peck

    (Ohio State University)

Abstract

We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.

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Paper provided by EconWPA in its series Microeconomics with number 9711004.

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Length: 34 pages
Date of creation: 25 Nov 1997
Handle: RePEc:wpa:wuwpmi:9711004
Note: Type of Document - postscript; prepared on pc-tex; to print on Postscript; pages: 34; figures: available from authors. comments welcome
Contact details of provider: Web page: http://econwpa.repec.org

Keywords: market game; rational expectations; excess volatility; information acquisition; efficient markets hypothesis;

Other versions of this item:

Find related papers by JEL classification:
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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  3. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1982. "Revelation of Information in Strategic Market Games: A Critique of Rational Expectations," Cowles Foundation Discussion Papers 634R, Cowles Foundation for Research in Economics, Yale University, revised Nov 1985.
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  24. John Y. Campbell & Albert S. Kyle, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 1-34.
  25. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
  26. Matthew O. Jackson & James Peck, 1993. "Costly Information Acquisition," Discussion Papers 1087, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:

  1. Bond, Philip & Eraslan, Hülya, 2010. "Information-based trade," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1675-1703, September.
  2. Meirowitz, Adam, 2005. "Deliberative Democracy or Market Democracy: Designing Institutions to Aggregate Preferences and Information," Papers 03-28-2005, Princeton University, Research Program in Political Economy.
  3. Muendler, Marc-Andreas, 2008. "Risk-neutral investors do not acquire information," Finance Research Letters, Elsevier, vol. 5(3), pages 156-161, September.
  4. Peck, James, 2014. "A battle of informed traders and the market game foundations for rational expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 88(C), pages 153-173.
  5. Jamsheed Shorish, 2010. "Functional rational expectations equilibria in market games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 43(3), pages 351-376, June.
  6. Richard McLean & James Peck & Andrew Postlewaite, 2004. "On Price-Taking Behavior in Asymmetric Information Economies," PIER Working Paper Archive 04-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. Levin, Dan & Peck, James & Ye, Lixin, 2007. "Bad news can be good news: Early dropouts in an English auction with multi-dimensional signals," Economics Letters, Elsevier, vol. 95(3), pages 462-467, June.
  8. Peck, James, 2003. "Large market games with demand uncertainty," Journal of Economic Theory, Elsevier, vol. 109(2), pages 283-299, April.
  9. Muendler, Marc-Andreas, 2005. "Risk Neutral Investors Do Not Acquire Information¤," University of California at San Diego, Economics Working Paper Series qt8fg5g853, Department of Economics, UC San Diego.
  10. Muendler, Marc-Andreas, 2007. "The possibility of informationally efficient markets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 467-483, March.
  11. Goenka, Aditya, 2000. "Informed Trading and the "Leakage" of Information," Economics Discussion Papers 8835, University of Essex, Department of Economics.
  12. Riekhof, Hans-Christian & Riekhof, Marie-Catherine & Brinkhoff, Stefan, 2012. "Predictive Markets: Ein vielversprechender Weg zur Verbesserung der Prognosequalität im Unternehmen?," PFH Forschungspapiere/Research Papers 2012/07, PFH Private University of Applied Sciences, Göttingen.
  13. Christopher Chambers & Paul Healy, 2012. "Updating toward the signal," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 765-786, August.

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