Competitive rational expectations equilibria without apology

Alexander Kovalenkov () and Xavier Vives

Journal of Economic Theory, 2014, vol. 149, issue C, 211-235

Abstract: 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.

Keywords: “Schizophrenia” problem; Strategic equilibrium; Large markets; Information acquisition; Free entry; Rate of convergence (search for similar items in EconPapers)
JEL-codes: D41 D43 G10 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (20)

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Related works:
Working Paper: Competitive Rational Expectations Equilibria without Apology (2008)
Working Paper: Competitive Rational Expectations Equilibria Without Apology (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:211-235

DOI: 10.1016/j.jet.2013.05.002

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