On Existence and Uniqueness of Equilibrium in Noisy Rational Expectations Economies

Abstract:     
I study a general class of noisy rational expectations economies that nests the standard Grossman and Stiglitz (1980) and Hellwig (1980) models, but relaxes the usual assumption of joint normality of asset payoffs and supply, and allows for general signal structures. I provide a constructive proof of existence of equilibrium, characterize the price function, and provide sufficient conditions for essential uniqueness, which are met by the Grossman and Stiglitz (1980) model. My solution approach sidesteps the typical "conjecture and verify" method, and I exhibit a number of non-normal examples in which asset prices can be characterized explicitly and in closed form. The results presented here open up a broad and tractable class of models for applications.

Number of Pages in PDF File: 44

Keywords: noisy rational expectations, asymmetric information, learning, information aggregation, exponential family

JEL Classification: D82, G14, G12

working papers series