Information aggregation in a financial market with general signal structure

Youcheng Lou; Sahar Parsa; Debraj Ray; Duan Li; Shouyang Wang

doi:10.1016/j.jet.2019.05.004

Information aggregation in a financial market with general signal structure

Youcheng Lou, Sahar Parsa, Debraj Ray, Duan Li, Shouyang Wang

Research output: Contribution to journal › Article › peer-review

Abstract

We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes.

Original language	English (US)
Pages (from-to)	594-624
Number of pages	31
Journal	Journal of Economic Theory
Volume	183
DOIs	https://doi.org/10.1016/j.jet.2019.05.004
State	Published - Sep 2019

Keywords

Asymmetric information
Information aggregation
Multidimensional signals
Rational expectations equilibrium

ASJC Scopus subject areas

Economics and Econometrics

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10.1016/j.jet.2019.05.004

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title = "Information aggregation in a financial market with general signal structure",

abstract = "We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes.",

keywords = "Asymmetric information, Information aggregation, Multidimensional signals, Rational expectations equilibrium",

author = "Youcheng Lou and Sahar Parsa and Debraj Ray and Duan Li and Shouyang Wang",

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year = "2019",

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doi = "10.1016/j.jet.2019.05.004",

language = "English (US)",

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AU - Lou, Youcheng

AU - Parsa, Sahar

AU - Ray, Debraj

AU - Li, Duan

AU - Wang, Shouyang

PY - 2019/9

Y1 - 2019/9

N2 - We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes.

AB - We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes.

KW - Asymmetric information

KW - Information aggregation

KW - Multidimensional signals

KW - Rational expectations equilibrium

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VL - 183

SP - 594

EP - 624

JO - Journal of Economic Theory

JF - Journal of Economic Theory

ER -

Information aggregation in a financial market with general signal structure

Abstract

Keywords

ASJC Scopus subject areas

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