Privileged information exacerbates market volatility

Gabriel Desgranges and Stephane Gauthier

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We study how asymmetric information affects market volatility in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium will be stable when it is the only rationalizable solution. It has been established in the literature that stability is obtained when the sensitivity of the outcome to agents' forecasts is less than 1, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, instability is obtained when the proportion of agents who a priori know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than 1.

Keywords: Asymmetric information; common knowledge; eductive learning; rational expectations; rationalizability; volatility.; Information asymétrique; connaissance commune; apprentissage divinatoire; rationalisabilité; anticipations rationnelles; volatilité. (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-cta, nep-fmk and nep-for
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Published in 2011

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Related works:
Working Paper: Privileged Information Exacerbates Market Volatility (2011)
Working Paper: Privileged information exacerbates market volatility (2011)
Working Paper: Privileged information exacerbates market volatility (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00639813

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