Dynamic market participation and endogenous information aggregation

Edison Yu

Journal of Economic Theory, 2018, vol. 175, issue C, 491-517

Abstract: This paper studies information aggregation in financial markets with recurrent investor exit and entry. I consider a dynamic general equilibrium model of asset trading with private information and collateral constraints. Investors differ in their aversion to Knightian uncertainty: When uncertainty is high, some investors exit the market. Since exiting investors' information is not fully revealed by prices, conditional return volatility and risk premia both increase. The model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty-averse investors. The model thus predicts less informative prices toward the end of a long boom. Moreover, economies with looser collateral constraints should see more volatility due to exit and partial revelation. Higher capital requirements potentially improve welfare by inducing more information revelation by prices.

JEL-codes: D81 D82 D83 G11 G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205311830036X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Dynamic market participation and endogenous information aggregation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:175:y:2018:i:c:p:491-517

DOI: 10.1016/j.jet.2018.02.002

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().