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American Economic Review Vol. 96 No. 5 2006

Crises and Prices: Information Aggregation, Multiplicity, and Volatility

George‐Marios Angeletos1; Iván Werning2

1 Department of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142, and National Bureau of Economic Research. · 2 Department of Economics, MIT, 50 Memorial Drive, Cambridge, MA 02142, NBER, and Universidad Toncuato di Tella.

Abstract

Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally.

DOI
10.1257/aer.96.5.1720
Volume
96
Issue
5
Pages
1720-1736
Language
en
Sources
openalex openalex crossref bibtex:phds-export.bib

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