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

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    Keywords

    • Sunspots
    • The Grossman-Stiglitz paradox

    ASJC Scopus subject areas

    • Economics and Econometrics

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