Crises and Prices: Information Aggregation, Multiplicity, and Volatility
American Economic Review
vol. 96,
no. 5, December 2006
(pp. 1720-1736)
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 anothers actions, highlighting the importance of endogenous information more generally. (JEL D53, D82, D83)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.96.5.1720JEL Classification
- D53 General Equilibrium and Disequilibrium: Financial Markets
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief