On Existence and Uniqueness of Equilibrium in a Class of Noisy Rational Expectations Models

75 Pages Posted: 11 Apr 2012 Last revised: 9 Mar 2015

See all articles by Bradyn M. Breon-Drish

Bradyn M. Breon-Drish

University of California, San Diego (UCSD) - Rady School of Management

Date Written: January 23, 2015

Abstract

I study a general class of noisy rational expectations models 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 more general signal structures. I provide a constructive proof of existence of equilibrium, characterize the price function, and provide sufficient conditions for uniqueness within the class of equilibria with continuous price functions, which are met by both the Grossman and Stiglitz (1980) model and the Hellwig (1980) model with a continuum of investors. My solution approach does not rely on 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 class of models for applied work. To illustrate the usefulness of generalizing the standard model, I show that in settings with non-normally distributed payoffs, shocks to fundamentals may be amplified purely due to learning effects, price drifts can arise naturally, and the disagreement-return relation depends in a novel way on return skewness.

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

JEL Classification: D82, G14, G12

Suggested Citation

Breon-Drish, Bradyn M., On Existence and Uniqueness of Equilibrium in a Class of Noisy Rational Expectations Models (January 23, 2015). Available at SSRN: https://ssrn.com/abstract=2038080 or http://dx.doi.org/10.2139/ssrn.2038080

Bradyn M. Breon-Drish (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,011
Abstract Views
4,147
Rank
41,427
PlumX Metrics