A Rational Expectations Model of Information Acquisition with Coordination Games

2010 ◽  
Author(s):  
Kai Du
Keyword(s):  
Information Acquisition ◽  
Rational Expectations ◽  
Coordination Games

Funding Constraints and Informational Efficiency

2020 ◽  
Author(s):  
Sergei Glebkin ◽  
Naveen Gondhi ◽  
John Chi-Fong Kuong
Keyword(s):  
Risk Premium ◽  
Equilibrium Model ◽  
Information Acquisition ◽  
Rational Expectations ◽  
Return Volatility ◽  
Informational Efficiency ◽  
Rational Expectations Equilibrium ◽  
Price Informativeness ◽  
Amplification Mechanism ◽  
Increases In Risk

Abstract We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.

INFORMATION DYNAMICS IN FINANCIAL MARKETS

2000 ◽  
Vol 4 (2) ◽  
pp. 139-169 ◽  
Author(s):  
Patrick de Fontnouvelle
Keyword(s):  
Information Acquisition ◽  
Trading Volume ◽  
Rational Expectations ◽  
Information Costs ◽  
Information Dynamics ◽  
Expectation Formation ◽  
Asset Trading ◽  
Future Value ◽  
Simulated Time ◽  
Simulated Time Series

A noisy rational expectations model of asset trading is extended to incorporate costs of information acquisition and expectation formation. Because of the information costs, how much information to acquire becomes an important decision. Agents make this decision by choosing an expectations strategy about the future value of information. Because expectation formation is costly, agents often choose strategies that are simpler (and thus cheaper) than rational expectations. The model's dynamics can be expressed in terms of the market precision, which represents the amount of information acquired by the average agent. Under certain conditions, market precision follows an unstable and highly irregular time path. This irregularity directly affects observable market quantities. In particular, simulated time series for return volatility and trading volume display a copersistence similar to that found in actual financial data.

Informed Trading with a Short-Sale Prohibition

2020 ◽  
Author(s):  
Stephen L. Lenkey
Keyword(s):  
Financial Market ◽  
Information Acquisition ◽  
Risk Sharing ◽  
Rational Expectations ◽  
Informed Trading ◽  
Short Selling ◽  
Short Sale ◽  
Market Depth ◽  
Information Sets ◽  
Empirical Implications

Using a rational expectations equilibrium framework, I evaluate the effects of a short-sale prohibition in an economy with asymmetrically informed investors who are identical except for their information sets. Relative to an economy in which short selling is permitted, the financial market is less informationally efficient under a short-sale ban even when the ban is not binding. This alters the risk-sharing environment and leads to an increase in information acquisition. Additionally, a short-sale prohibition increases market depth. Imposing a cost on short selling instead of a strict prohibition yields similar results. Novel empirical implications are identified. This paper was accepted by Karl Diether, finance.

Rational Expectations and Inflation

2017 ◽  
Author(s):  
Thomas J. Sargent
Keyword(s):  
World War I ◽  
French Revolution ◽  
Rational Expectations ◽  
Ronald Reagan ◽  
Fiscal Policies ◽  
Economic Policies ◽  
Budget Deficits ◽  
Nobel Lecture ◽  
Economic Decisions ◽  
The French Revolution

This collection of essays uses the lens of rational expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which the author was awarded the 2011 Nobel Prize in economics. Rational expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. This book engages with practical problems in economics in a less formal, noneconometric way, demonstrating how rational expectations can satisfactorily interpret a range of historical and contemporary events. It focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, the book finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated. This fully expanded edition includes the author's 2011 Nobel lecture, “United States Then, Europe Now.” It also features new articles on the macroeconomics of the French Revolution and government budget deficits.

The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

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