Limited Degree of Publicity and Over-Reaction during Speculative Episodes

Publicité limitée de l'information et surréaction aux annonces lors des épisodes spéculatifs

Camille Cornand and Frank Heinemann

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Abstract: The model of Morris and Shin [2002] shows that imprecise public announcements can coordinate the actions of speculators far from the fundamental because of over-reaction to announcements. The strong focal potential of common knowledge is welfare damaging when it induces over-reaction to an imprecise public signal. However, laboratory experiments show that agents over-react to announcements, but not as much as what is theoretically predicted in models based on public information that generates common knowledge. This paper introduces the notion of limited degree of publicity, which seems to render better account for the actual degree of agents' over-reaction.

Date: 2006
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Published in Revue Economique, 2006, 57 (3), pp.399-405. ⟨10.3917/reco.573.0399⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00279362

DOI: 10.3917/reco.573.0399

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