Privileged information exacerbates market volatility

Gabriel Desgranges and Stephane Gauthier

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

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 is obtained 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 is obtained 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: 35 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cta, nep-for and nep-mic
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ftp://mse.univ-paris1.fr/pub/mse/CES2011/11061.pdf (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:11061

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