Resource title

Competitive rational expectations equilibria without apology

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Resource description

In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in each situation converge to each other at a rate of 1/N as the market becomes large. The approximation is particularly good when the informationally adjusted risk bearing capacity of traders is not very large. This is not the case if informed traders are close to risk neutral. Both equilibria converge to the competitive equilibrium of an idealized limit continuum economy as the market becomes large at a slower rate of 1/N and, therefore, the limit equilibrium need not be a good approximation of the strategic equilibrium in moderately large markets.

Resource author

Alexander Kovalenkov, Xavier Vives

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26491

Resource license

Adapt according to the presented license agreement and reference the original author.