Reconsidering the Impossibility of Informationally Efficient Markets

25 Pages Posted: 1 Jun 2005  

Karl Ludwig Keiber

European University Viadrina Frankfurt (Oder) - Department of Economics

Date Written: March 2005

Abstract

This paper reconsiders Grossman and Stiglitz's (1980) analysis and delivers a comparative static result which the original exhibition misses. In detail, an increase of the payoff of the risk free security is reported to affect the informativeness of the rational expectations equilibrium adversely. Furthermore, contrary to Grossman and Stiglitz (1980) both the noisy rational expectations equilibrium and the equilibrium in the market for information are characterized explicitly as functions of the underlying economy's parameters. The incompatibility of a fully revealing rational expectations equilibrium and costly acquisition of private information is obtained by means of an argument borrowed from linear regression theory.

Keywords: Noisy rational expectations equilibrium, informational efficiency, market for information

JEL Classification: G14, D82, D41

Suggested Citation

Keiber, Karl Ludwig, Reconsidering the Impossibility of Informationally Efficient Markets (March 2005). Available at SSRN: https://ssrn.com/abstract=695922 or http://dx.doi.org/10.2139/ssrn.695922

Karl Ludwig Keiber (Contact Author)

European University Viadrina Frankfurt (Oder) - Department of Economics ( email )

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Germany
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HOME PAGE: http://www.wiwi.euv-frankfurt-o.de/keiber

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