Private information and sunspots in sequential asset markets

Jess Benhabib, Pengfei Wang

    Research output: Contribution to journalArticle

    Abstract

    We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully revealing rational expectations equilibria, there exists a continuum of equilibrium prices consistent with rational expectations, where the asset prices are subject to sunspot shocks. Such sunspot shocks can generate persistent fluctuations in asset prices that look like a random walk in an efficient market.

    Original languageEnglish (US)
    Pages (from-to)558-584
    Number of pages27
    JournalJournal of Economic Theory
    Volume158
    Issue numberPB
    DOIs
    StatePublished - Jul 1 2015

    Fingerprint

    Private information
    Sunspots
    Asset markets
    Asset prices
    Asset returns
    Market price
    Rational expectations equilibrium
    Efficient markets
    Equilibrium price
    Assets
    Fluctuations
    Rational expectations
    Random walk
    Capital gains
    Maturity

    Keywords

    • Sunspots
    • The Grossman-Stiglitz paradox

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Private information and sunspots in sequential asset markets. / Benhabib, Jess; Wang, Pengfei.

    In: Journal of Economic Theory, Vol. 158, No. PB, 01.07.2015, p. 558-584.

    Research output: Contribution to journalArticle

    Benhabib, Jess ; Wang, Pengfei. / Private information and sunspots in sequential asset markets. In: Journal of Economic Theory. 2015 ; Vol. 158, No. PB. pp. 558-584.
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