Competitive rational expectations equilibria without apology

Consider a financial market with N risk-averse asymmetrically informed traders. When N grows at the same rate as noise trading, prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1/N. Equilibria in the two scenarios are close when noise tradi...

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Bibliographic Details
Published inJournal of economic theory Vol. 149; pp. 211 - 235
Main Authors Kovalenkov, Alexander, Vives, Xavier
Format Journal Article
LanguageEnglish
Published New York Elsevier Inc 01.01.2014
Elsevier Science Publishing Company, Inc
Subjects
Acquisitions
Asymmetry
Capital market
Competition
Economic theory
Equilibrium
Free entry
Information acquisition
Information retrieval
Investment policy
Large markets
Rate of convergence
Rational expectations
Risk aversion
Securities trading
Strategic equilibrium
Studies
“Schizophrenia” problem
D41
D43
Strategic equilibrium
Information acquisition
Free entry
G10
Large markets
G12
“Schizophrenia” problem
Rate of convergence
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Summary:Consider a financial market with N risk-averse asymmetrically informed traders. When N grows at the same rate as noise trading, prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1/N. Equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk-bearing capacity. Both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1/N. The results extend to endogenous information acquisition and the connections with the Grossman–Stiglitz paradox are highlighted.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2013.05.002