Privileged Information Exacerbates Market Volatility

Gabriel Desgranges and Stephane Gauthier

No 2011-14, Working Papers from Center for Research in Economics and Statistics

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 obtains 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 obtains 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 (search for similar items in EconPapers)
JEL-codes: C62 D82 D84 (search for similar items in EconPapers)
Pages: 28
Date: 2011-05
New Economics Papers: this item is included in nep-cta and nep-for
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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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