American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
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