A battle of informed traders and the market game foundations for rational expectations equilibrium

James Peck

Games and Economic Behavior, 2014, vol. 88, issue C, 153-173

Abstract: Potential manipulation of prices and convergence to rational expectations equilibrium is studied in a game without noise traders. Informed players with initially long and short positions (bulls and bears) seek to manipulate consumer expectations in opposite directions. In equilibrium, period 1 prices reveal the state, so manipulation is unsuccessful. Bears and uninformed consumers sell up to their short-sale limits in period 1. Bulls buy in period 1 but receive arbitrage losses. When the number of bulls and bears approaches infinity, the equilibrium converges to the REE. Without short-sale constraints there is a non-revealing equilibrium but no revealing equilibrium.

Keywords: Price manipulation; Rational expectations; Market game; Noise traders (search for similar items in EconPapers)
JEL-codes: D43 D53 D84 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:88:y:2014:i:c:p:153-173

DOI: 10.1016/j.geb.2014.09.004

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