Crises and Prices: Information Aggregation, Multiplicity and Volatility

37 Pages Posted: 14 Dec 2004

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 14, 2004

Abstract

Many argue that crises - such as currency attacks, bank runs and riots - can be described as times of non-fundamental volatility. We argue that crises are also times when endogenous sources of information are closely monitored and thus an important part of the phenomena. We study the role of endogenous information in generating volatility by introducing a financial market in a coordination game where agents have heterogeneous information about the fundamentals. The equilibrium price aggregates information without restoring common knowledge. In contrast to the case with exogenous information, we find that uniqueness may not be obtained as a perturbation from common knowledge: multiplicity is ensured when individuals observe fundamentals with small idiosyncratic noise. Multiplicity may emerge also in the financial price. When the equilibrium is unique, it becomes more sensitive to non-fundamental shocks as private noise is reduced.

Keywords: Multiple equilibria, coordination, global games, speculative attacks, currency crises, bank runs, financial crashes, rational expectations

JEL Classification: D8, E5, F3, G1

Suggested Citation

Angeletos, George-Marios and Werning, Ivan, Crises and Prices: Information Aggregation, Multiplicity and Volatility (December 14, 2004). MIT Department of Economics Working Paper No. 04-43. Available at SSRN: https://ssrn.com/abstract=634881 or http://dx.doi.org/10.2139/ssrn.634881

George-Marios Angeletos (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Room E52-251
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617-253-1330 (Fax)

HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

National Bureau of Economic Research (NBER) ( email )

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