Dynamic Market Participation and Endogenous Information Aggregation

42 Pages Posted: 24 Jun 2017 Last revised: 6 Feb 2018

See all articles by Edison G. Yu

Edison G. Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: February 2018

Abstract

This paper studies information aggregation in financial markets with recurrent investor exit and entry. I consider a dynamic general equilibrium model of asset trading with private information and collateral constraints. Investors differ in their aversion to Knightian uncertainty: When uncertainty is high, some investors exit the market. Since exiting investors' information is not fully revealed by prices, conditional return volatility and risk premia both increase. The model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty-averse investors. The model thus predicts less informative prices toward the end of a long boom. Moreover, economies with looser collateral constraints should see more volatility due to exit and partial revelation. Higher capital requirements potentially improve welfare by inducing more information revelation by prices.

JEL Classification: D81, D82, D83, G11, G12, G14

Suggested Citation

Yu, Edison G., Dynamic Market Participation and Endogenous Information Aggregation (February 2018). Available at SSRN: https://ssrn.com/abstract=2991228 or http://dx.doi.org/10.2139/ssrn.2991228

Edison G. Yu (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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