Dynamic Noisy Rational Expectations Equilibrium with Insider Information

58 Pages Posted: 2 Jul 2020

See all articles by Jerome Detemple

Jerome Detemple

Boston University Questrom School of Business; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Marcel Rindisbacher

Questrom School of Business, Boston University; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Scott Robertson

Questrom School of Business, Boston University

Date Written: June 5, 2020

Abstract

We study equilibria in multi-asset and multi-agent continuous-time economies with asymmetric information and bounded rational noise traders. We establish existence of two equilibria. First, a full communication one where the informed agents' signal is disclosed to the market, and static policies are optimal. Second, a partial communication one where the signal disclosed is affine in the informed and noise traders' signals, and dynamic policies are optimal. Here, information asymmetry creates demand for two public funds, as well as a dark pool where private information trades can be implemented. Markets are endogenously complete and equilibrium returns have a three factor structure, with stochastic factors and loadings. Results are valid for constant absolute risk averse investors; general vector diffusions for fundamentals; non-linear terminal payoffs, and non-Gaussian noise trading. Asset price dynamics and public information flows are endogenous, and rational expectations equilibria are special cases of the general results.

Keywords: Rational Expectations Equilibrium, Heterogenous Information, Diffusions, Prices, Risk Premia, Volatility, Portfolios

JEL Classification: D82, G11, G12, C62

Suggested Citation

Detemple, Jerome and Rindisbacher, Marcel and Robertson, Scott, Dynamic Noisy Rational Expectations Equilibrium with Insider Information (June 5, 2020). Econometrica, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3623410

Jerome Detemple

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Marcel Rindisbacher

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4152 (Phone)
617 353 999 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Scott Robertson (Contact Author)

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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