Crises and Prices-Information Aggregation, Multiplicity and Volatility

Abstract: Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price acts as a public signal aggregating dispersed private information. In contrast to the case with exogenous information, we ˉnd that uniqueness may not be obtained as a perturbation from common knowledge: multiplicity is ensured with small noise. We further show that multiplicity may emerge in the ˉnancial price itself. Moreover, less noise may contribute toward volatility even when the equilibrium is unique. Finally, similar results obtain for a model without a ˉnancial market, where individuals instead observe one another's actions, highlighting the importance of endogenous information more generally.

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

Authors: George-Marios Angeletos, Ivan Werning

13 Angeletos & Werning 2005.pdf