ON THE POSSIBILITY OF INFORMATIONALLY EFFICIENT MARKETS

Xavier Vives

94 citations0/0 files storedJournal of the European Economic Association

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Economic theories and models Financial Markets and Investment Strategies Game Theory and Applications

Abstract

This paper presents conditions for a resolution of the Grossman–Stiglitz paradox of informationally efficient markets. We display a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved as long as the correlation in traders’ valuations is not too large. The equilibrium is efficient, and the problems associated with fully revealing rational expectations equilibria are precluded without resorting necessarily to noise traders. The robustness of the results to general information structures is established and the effect of market power is examined in a large market approximation to the competitive economy. The model is applied to explain changes in bidding behavior in central bank liquidity auctions in the crisis period. (JEL: D82, D84, G14, E59)

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References

1996The Use of Knowledge in Society 1980On the Impossibility of Informationally Efficient Markets 1980On the Impossibility of Informationally Efficient Markets 1986Noise 1980On the aggregation of information in competitive markets 1981Information aggregation in a noisy rational expectations economy 1989Informed Speculation with Imperfect Competition 1976Information and Competitive Price Systems

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