Competitive rational expectations equilibria without apology

Arbeitspapier

In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in each situation converge to each other at a rate of 1/N as the market becomes large. The approximation is particularly good when the informationally adjusted risk bearing capacity of traders is not very large. This is not the case if informed traders are close to risk neutral. Both equilibria converge to the competitive equilibrium of an idealized limit continuum economy as the market becomes large at a slower rate of 1/N and, therefore, the limit equilibrium need not be a good approximation of the strategic equilibrium in moderately large markets.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2446

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates ; Market Structure, Pricing, and Design: Perfect Competition ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
• Subject: Schizophrenia problem ; strategic equilibrium ; large markets ; information acquisition ; free entry ; rate of convergence ; Finanzmarkt ; Wertpapierhandel ; Risikoaversion ; Asymmetrische Information ; Rationale Erwartung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kovalenkov, Alexander ; Vives, Xavier
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/26491
• Last update: 10.03.2025, 11:45 AM CET