Information and Volatility

Dirk Bergemann, Tibor Heumann and Stephen Morris

No 1928RR, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: In an economy of interacting agents with both idiosyncratic and aggregate shocks, we examine how the structure of private information influences aggregate volatility. The maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and aggregate shocks, and display excess response to the aggregate shocks, as in Lucas [14]. For any given variance of aggregate shocks, the upper bound on aggregate volatility is linearly increasing in the variance of the idiosyncratic shocks. Our results hold in a setting of symmetric agents with linear best responses and normal uncertainty. We establish our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure. This tractable characterization, extending results in Bergemann and Morris [8], can be used to address a wide variety of questions linking information with the statistical moments of the economy.

Keywords: Incomplete information; Idiosyncratic shocks; Aggregate shocks; Volatility; Confounding information; Moment restrictions; Linear best responses; Quadratic payoffs; Bayes correlated equilibrium (search for similar items in EconPapers)
JEL-codes: C72 C73 D43 D83 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2013-12, Revised 2014-10
New Economics Papers: this item is included in nep-cta, nep-gth, nep-ict and nep-mic
References: View references in EconPapers View complete reference list from CitEc
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Published in Journal of Economic Theory (July 2015), 158(B): 427-465

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Related works:
Journal Article: Information and volatility (2015)
Working Paper: Information and Volatility (2014)
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