On Equilibrium Existence in a Finite-Agent, Multi-Asset Noisy Rational Expectations Economy

2018 ◽  
Author(s):  
Ronaldo Carpio ◽  
Meixin Guo
Keyword(s):  
Rational Expectations ◽  
Equilibrium Existence ◽  
Noisy Rational Expectations

On Equilibrium Existence in a Finite-Agent, Multi-Asset Noisy Rational Expectations Economy

2019 ◽  
Vol 20 (1) ◽  
Author(s):  
Ronaldo Carpio ◽  
Meixin Guo
Keyword(s):  
Rational Expectations ◽  
Positive Semidefinite ◽  
Finite Model ◽  
Equilibrium Existence ◽  
Equilibrium Behavior ◽  
Asset Pricing Model ◽  
Novel Method ◽  
The Difference ◽  
And Behavior ◽  
Semidefinite Matrix

AbstractWe introduce a novel method of proving existence of rational expectations equilibria (REE) in multi-dimensional CARA-Gaussian environments. Our approach is to construct a mapping from agents’ initial beliefs (which are characterized by a positive semidefinite matrix), to their updated beliefs, after reaching and observing equilibrium; we then show Brouwer’s fixed point theorem applies. We apply our approach to a finite-market version of Admati (1985), which is a multi-asset noisy REE asset pricing model with dispersed information. We present an algorithm to numerically solve for equilibrium of the finite model, as well as several examples illustrating the difference in equilibrium behavior between the finite and infinite models. Our method can be applied to any multi-dimensional REE model with Gaussian uncertainty and behavior that is linear in agents’ information.

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