Dynamic Noisy Rational Expectations Equilibrium with Information Production and Beliefs-Based Speculation (original) (raw)
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Dynamic noisy rational expectations equilibrium with insider information: Welfare and regulation
Journal of Economic Dynamics and Control, 2022
We study equilibria in multi-asset and multi-agent continuous-time economies with asymmetric information and bounded rational noise traders. We establish the existence of two equilibria. First, a full communication equilibrium where the informed agents' signal is disclosed to the market and static policies are optimal. Second, a partial communication equilibrium where the signal disclosed is affine in the informed and noise traders' signals, and dynamic policies are optimal. Here, information asymmetry creates demand for two public funds, as well as a dark pool where private information trades can be implemented. Markets are endogenously complete and equilibrium returns have a three factor structure with stochastic factors and loadings. Results are valid for constant absolute risk averse investors, general vector diffusions for fundamentals, nonlinear terminal payoffs, and non-Gaussian noise trading. Asset price dynamics and public information flows are endogenous, and rational expectations equilibria are special cases of the general results.
INFORMATION AGGREGATION IN A NOISY RATIONAL EXPECTATIONS ECONOMY
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Noise and aggregation of information in competitive rational expectations models
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Background Risk and Trading in a Full-Information Rational Expectations Economy
In this paper, we assume that investors have the same information, buttrade due to the evolution of their non-market wealth. In ourformulation, investors rebalance their portfolios in response to changesin their expected non-market wealth, and hence trade. We assume anincomplete market in which risky non-market wealth is non-hedgeable andindependent of market risk, and thus represents an additive backgroundrisk. Investors who experience positive shocks to their expected wealthbuy more stocks from those who experience less positive shocks. Theextent of trading depends on the heterogeneity of the shocks to theexpected background risk across the agents. The demands of the twoagents are convex or concave in the state of the economy, whichjustifies trading in the aggregate assets and contingent claims.
Endogenous differential information in financial markets
2012
Abstract. We develop a two period general equilibrium model with incomplete financial markets and differential information. Making endogenous the traditional informational restriction on con-sumption, we allow agents to obtain information from physical and financial markets. ...
The dynamics of partially-revealing rational expectations equilibria
This paper investigates the qualitative properties of a dynamic rational expectations equilibrium model where incomplete private information revelation is possible. The information revelation properties of prices are endogenous to the model. Periods of complete and incomplete information revelation are examined and it is shown that the private information of ambiguity averse investors tends to be revealed following periods of poor market performance. It is further demonstrated that the differences in long-run market prices that arise from partially-and fully-revealing equilibria are significant. These results shed some light on the market selection hypothesis under asymmetric information. * The paper is preliminary and incomplete, we welcome comments and suggestions.
Information Spillovers in Asset Markets with Correlated Values
We study information spillovers in a dynamic setting with privately informed traders and correlated asset values. A trade of one asset (or lack thereof) can provide information about the value of other assets. The information content of trading behavior is endogenously determined in equilibrium. We show that this endogeneity leads to multiple equilibria when the correlation between asset values is sufficiently high. The equilibria are ranked in terms of both trade volume and efficiency. We study the implications for policies that target market transparency as well as the market's ability to aggregate information. Total welfare is higher in any equilibrium of a fully transparent market than in a fully opaque one. However, both welfare and trading activity can decrease in the degree of market transparency. If traders have asymmetric access to transaction data, transparency levels the playing field, reduces the rents of more informed traders, but may also reduce total welfare. Moreover, even in a fully transparent market, information is not necessarily aggregated as the number of informed traders becomes arbitrarily large.
2006
We construct a parsimonious model of a …nancial market where the marginal investor is an endogenous noise trader. Such a trader anticipates that future shocks may force him to exit his position. In compensation he requires a higher return. We show that the original seller of the asset pays the required return. This can only be optimal if the seller has access to an investment opportunity that gives a su¢ ciently high return, compared to the noise trader's investment opportunities. We also show that, if the noise trader expects to get informative signals, the required return does not necessarily decrease, as claimed in the earlier literature.
Speculative trading with rational beliefs and endogenous uncertainty
Economic Theory, 2003
This paper introduces the framework of rational beliefs of Kurz (1994), which makes the assumptions of heterogeneous beliefs of Harrison and Kreps (1978) and Morris (1996) more plausible. Agents hold diverse beliefs that are "rational" in the sense of being compatible with ample observed data. In a non-stationary environment the agents only learn about the stationary measure of observed data, but their beliefs can remain non-stationary and diverse. Speculative trading then stems from disagreements among traders. In a Markovian framework of dividends and beliefs, we obtain analytical results to show how the speculative premium depends on the extent of heterogeneity of beliefs. In addition, we demonstrate that there exists a unique Rational Belief Equilibrium (RBE) generically with endogenous uncertainty (as defined by Kurz and Wu, 1996) and that the RBE price is higher than the rational expectation equilibrium price (REE) under some general conditions.
Noise and Aggregation of Information in Large Markets
SSRN Electronic Journal, 2000
We study the relation between noise (liquidity traders, endowment shocks) and the aggregation of information in financial markets with large number of agents. We show that as long as noise increases with the number of agents, the limiting equilibrium is well-defined and leads to non-trivial information acquisition, even when per-capita noise tends to zero. In such equilibrium risk sharing and price revelation play different roles than in the standard limiting economy in which per-capita noise is finite. We apply our model to study information sales by a monopolist, and information acquisition in multi-asset markets, showing that it leads to qualitatively different results with respect to those in the existing literature. Our conditions on noise are shown to be necessary and sufficient to have limiting economies with perfectly competitive behavior consistent with endogenous information acquisition.