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American Economic Review: Vol. 96 No. 5 (December 2006)
AER Volume. 96, Issue 5 | 
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Crises and Prices: Information Aggregation, Multiplicity, and Volatility
Article Citation
Angeletos, George-Marios, and
Iván Werning. 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility."
American Economic Review,
96(5): 1720-1736.
DOI: 10.1257/aer.96.5.1720
DOI: 10.1257/aer.96.5.1720
Abstract
Crises are volatile times when endogenous sources of information are closely
monitored. We study the role of information in crises by introducing a financial
market in a coordination game with imperfect information. The asset price aggregates
dispersed private information acting as a public noisy signal. In contrast to
the case with exogenous information, our main result is that uniqueness may not
obtain as a perturbation from perfect information: multiplicity is ensured with small
noise. In addition, we show that: (a) multiplicity may emerge in the financial price
itself; (b) less noise may contribute toward nonfundamental volatility even when the
equilibrium is unique; and (c) similar results obtain for a model where individuals
observe one another?s actions, highlighting the importance of endogenous information
more generally. (JEL D53, D82, D83)
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Authors
Angeletos, George-Marios
Werning, Iván
Werning, Iván
