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A battle of informed traders and the market game foundations for rational expectations equilibrium

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  • Peck, James

Abstract

Potential manipulation of prices and convergence to rational expectations equilibrium is studied in a game without noise traders. Informed players with initially long and short positions (bulls and bears) seek to manipulate consumer expectations in opposite directions. In equilibrium, period 1 prices reveal the state, so manipulation is unsuccessful. Bears and uninformed consumers sell up to their short-sale limits in period 1. Bulls buy in period 1 but receive arbitrage losses. When the number of bulls and bears approaches infinity, the equilibrium converges to the REE. Without short-sale constraints there is a non-revealing equilibrium but no revealing equilibrium.

Suggested Citation

  • Peck, James, 2014. "A battle of informed traders and the market game foundations for rational expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 88(C), pages 153-173.
    • Handle: RePEc:eee:gamebe:v:88:y:2014:i:c:p:153-173
    DOI: 10.1016/j.geb.2014.09.004
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    2. Benhabib, Jess & Wang, Pengfei, 2015. "Private information and sunspots in sequential asset markets," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 558-584.
    3. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    4. Hu, Tai-Wei & Wallace, Neil, 2016. "Information aggregation in a large multi-stage market game," Journal of Economic Theory, Elsevier, vol. 161(C), pages 103-144.
    5. Huang, Xuesong, 2021. "Incentive compatible self-fulfilling mechanisms and rational expectations," Games and Economic Behavior, Elsevier, vol. 126(C), pages 100-135.

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    More about this item

    Keywords

    Price manipulation; Rational expectations; Market game; Noise traders;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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