Uncertainty, Information Acquisition and Price Swings in Asset Markets

Review of Economic Studies (2015) 82 (4): 1533-1567

85 Pages Posted: 6 May 2009 Last revised: 1 Feb 2018

See all articles by Antonio Mele

Antonio Mele

University of Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Francesco Sangiorgi

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: March 15, 2015

Abstract

This paper analyzes costly information acquisition in asset markets with Knightian uncertainty about the asset fundamentals. In these markets, acquiring information not only reduces the expected variability of the fundamentals for a given distribution (i.e., risk). It also mitigates the uncertainty about the true distribution of the fundamentals. Agents who lack knowledge of this distribution cannot correctly interpret the information other investors impound into the price. We show that, due to uncertainty aversion, the incentives to reduce uncertainty by acquiring information increase as more investors acquire information. When uncertainty is high enough, information acquisition decisions become strategic complements and lead to multiple equilibria. Swift changes in information demand can drive large price swings even after small changes in Knightian uncertainty.

Keywords: Asset markets with Knightian uncertainty, asymmetric information, value of parameter uncertainty, information complementarities, multiple equilibria

JEL Classification: G12, G14, D82

Suggested Citation

Mele, Antonio and Sangiorgi, Francesco, Uncertainty, Information Acquisition and Price Swings in Asset Markets (March 15, 2015). Review of Economic Studies (2015) 82 (4): 1533-1567. Available at SSRN: https://ssrn.com/abstract=1398870 or http://dx.doi.org/10.2139/ssrn.1398870

Antonio Mele

University of Lugano ( email )

Via Buffi 13
Lugano, 6900
Switzerland

HOME PAGE: http://antoniomele.org

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Francesco Sangiorgi (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 34
Frankfurt am Main, 60322
Germany

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