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Crises and Prices Information Aggregation, Multiplicity and Volatility �
| Citations: | 30 - 0 self |
BibTeX
@MISC{Angeletos_crisesand,
author = {George-marios Angeletos and Iván Werning},
title = {Crises and Prices Information Aggregation, Multiplicity and Volatility �},
year = {}
}
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Abstract
Crises, such as currency attacks, bank runs and riots, can be described as times of non-fundamental volatility. We argue that crises are also times when endogenous sources of information are closely monitored and thus an important part of the phenomena. We study the role of endogenous information in generating non-fundamental volatility by introducing a financial market in a coordination game where agents have heterogeneous information about the fundamental. The equilibrium price aggregates information without restoring common knowledge. In contrast to the case with exogenous information, we find that uniqueness may not be obtained as a perturbation from common knowledge: multiplicity is ensured when individuals observe fundamentals with small idiosyncratic noise. Moreover, multiplicity may also emerge in the financial price itself. When the equilibrium is unique, it becomes more sensitive to non-fundamental shocks as noise is reduced. Similar results are obtained when agents observe a signal of aggregate activity instead of a financial price, stressing that the main mechanism for our results is information aggregation.
Keyphrases
price information aggregation financial price non-fundamental volatility common knowledge coordination game exogenous information information aggregation important part currency attack aggregate activity endogenous information similar result bank run heterogeneous information equilibrium price aggregate information financial market non-fundamental shock small idiosyncratic noise main mechanism endogenous source
