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Crises and prices
information aggregation, multiplicity and volatility
George-Marios Angeletos, Ivan Werning

Published 2004 by Massachusetts Institute of Technology, Dept. of Economics in Cambridge, Mass .
Written in English.

About the Book

Many argue that crises - such as currency attacks, bank runs and riots - can be described as times of non-fundamental volatility. We argue that crises are also times when endogenous sources of information are closely monitored and thus an important part of the phenomena. We study the role of endogenous information in generating volatility by introducing a financial market in a coordination game where agents have heterogeneous information about the fundamentals. The equilibrium price aggregates information without restoring common knowledge. In contrast to the case with exogenous information, we find that uniqueness may not be obtained as a perturbation from common knowledge: multiplicity is ensured when individuals observe fundamentals with small idiosyncratic noise. Multiplicity may emerge also in the financial price. When the equilibrium is unique, it becomes more sensitive to non-fundamental shocks as private noise is reduced. Keywords: Multiple equilibria, coordination, global games, speculative attacks, currency crises, bank runs, financial crashes, rational expectations. JEL Classifications: D8, E5, F3, G1.

Edition Notes

"December 14, 2004."

Includes bibliographical references (p. 33-34).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.

Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-43, Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-43.

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34 p. :
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