Information Acquisition in a Noisy Rational Expectations Economy

Econometrica ◽  
1982 ◽  
Vol 50 (6) ◽  
pp. 1415 ◽  
Author(s):  
Robert E. Verrecchia
Keyword(s):  
Information Acquisition ◽  
Rational Expectations ◽  
Noisy Rational Expectations

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.

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