Is beauty contagious? How higher-order uncertainty can drive asset prices

Ole Jann

VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy from Verein für Socialpolitik / German Economic Association

Abstract: I show how irrational ideas and rumors can drive asset prices - not because anyone believes them, but because they are commonly known without being common knowledge. The phenomenon is driven by short-term market participants who are well-informed about the information that others have, and who therefore find it impossible to ignore pieces of news even though they know them to be false, know that others know that they are false, and so on. Informative trading becomes unrationalizable; no information is incorporated into the market price. I discuss implications for how mass media can hurt the informational efficiency of markets.

Keywords: Speculation; informational efficiency; multiple equilibria; beauty contest; common knowledge; global games; infection; contagion (search for similar items in EconPapers)
JEL-codes: D82 D84 G14 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc19:203590

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