Abstract

http://ssrn.com/abstract=2446873
 


 



Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims


Georgy Chabakauri


London School of Economics and Political Science

Kathy Yuan


London School of Economics - Department of Finance

Konstantinos E. Zachariadis


London School of Economics

February 1, 2015


Abstract:     
We consider a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors, and noise traders. We relax the usual assumption of normally distributed asset payoffs and allow for assets with very general payoff distributions, including non-redundant contingent claims, such as options and other derivatives. We provide necessary and sufficient conditions under which contingent claims provide information about the source of uncertainty in the economy and, hence, reduce the asymmetry of information. We also apply our results to pricing risky debt and equity and demonstrate that firms cannot manipulate the information contained in debt and equity prices by changing the face value of debt. Our paper provides a new tractable framework for studying asset prices under asymmetric information. When the market is complete, we derive the equilibrium in closed form. When the market is incomplete, we derive it in terms of easily computable inverse functions.

Number of Pages in PDF File: 54

Keywords: asymmetric information, rational expectations, learning from prices, contingent claims, derivative securities

JEL Classification: D82, G12, G14


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Date posted: June 8, 2014 ; Last revised: February 27, 2015

Suggested Citation

Chabakauri, Georgy and Yuan, Kathy and Zachariadis, Konstantinos E., Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims (February 1, 2015). Available at SSRN: http://ssrn.com/abstract=2446873

Contact Information

Georgy Chabakauri (Contact Author)
London School of Economics and Political Science ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/
Kathy Zhichao Yuan
London School of Economics - Department of Finance ( email )
Old Building
Houghton St
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)
HOME PAGE: http://fmg.lse.ac.uk/~kathy
Konstantinos E. Zachariadis
London School of Economics ( email )
Houghton St
Department of Finance
London, WC2A 2AE
United Kingdom
+442079556541 (Phone)
+442078494647 (Fax)
HOME PAGE: http://www2.lse.ac.uk/finance/people/profiles/KostasZachariadis.aspx
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