Crises and Prices: Information Aggregation, Multiplicity, and Volatility

Iván Werning and George-Marios Angeletos

American Economic Review, 2006, vol. 96, issue 5, 1720-1736

Abstract: Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally. (JEL D53, D82, D83)

Date: 2006
Note: DOI: 10.1257/aer.96.5.1720
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Related works:
Working Paper: Crises and Prices: Information Aggregation, Multiplicity and Volatility (2005)
Working Paper: Crises and Prices: Information Aggregation, Multiplicity and Volatility (2004)
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