Complementarities, Multiplicity, and Supply Information
Journal of the European Economic Association, Vol. 7, No. 1, pp. 90-115, 2009
46 Pages Posted: 13 Jul 2006 Last revised: 13 Aug 2011
Date Written: September 10, 2008
If traders can obtain private information about the supply of a stock in addition to that about its payoff, then (i) complementarity in information acquisition and (ii) multiple equilibria in the financial market and the information market can exist. The additional dimension of supply information increases coordination possibilities in the financial market leading to multiple equilibria. The existence of multiple (two) information sources can lead to information acquisition being complementary. The multiplicity of equilibria is suggestive of excess volatility and crashes. The different financial market equilibria imply differing patterns of cost of capital and volume of trade.
Keywords: CARA-normal, supply information, complementarities, multiplicity
JEL Classification: D82, D83, G14
Suggested Citation: Suggested Citation