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Dynamic information acquisition and time-varying uncertainty

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  • Cai, Zhifeng

Abstract

This paper studies the role of information acquisition in propagating/stabilizing uncertainty shocks in a dynamic financial market. In a static world, uncertainty raises the value of information, which encourages more information acquisition. In a dynamic world, however, uncertainty can depress information acquisition through a dynamic complementarity channel: More uncertainty induces future investors to trade more cautiously. This renders future resale stock price less informative and reduces the value of information today. Due to the dynamic complementarity, transitory uncertainty shocks can have long-lasting impacts. Direct government purchases can stimulate information production, eliminate equilibrium multiplicity, and attenuate the impacts of uncertainty shocks by raising the effective risk-bearing capacity of the informed investors.

Suggested Citation

  • Cai, Zhifeng, 2019. "Dynamic information acquisition and time-varying uncertainty," Journal of Economic Theory, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:jetheo:v:184:y:2019:i:c:s0022053118304721
    DOI: 10.1016/j.jet.2019.104947
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    References listed on IDEAS

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    More about this item

    Keywords

    Information acquisition; Financial markets; Dynamic complementarity; Multiplicity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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