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Reconsidering the impossibility of informationally efficient markets

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  • Karl Ludwig Keiber

Abstract

This article 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.

Suggested Citation

  • Karl Ludwig Keiber, 2007. "Reconsidering the impossibility of informationally efficient markets," Applied Financial Economics, Taylor & Francis Journals, vol. 17(14), pages 1113-1122.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:14:p:1113-1122
    DOI: 10.1080/09603100600892871
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    References listed on IDEAS

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    1. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
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    4. Toft, Klaus Bjerre, 1996. "On the Mean-Variance Tradeoff in Option Replication with Transactions Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(2), pages 233-263, June.
    5. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    6. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, April.
    7. Admati, Anat R., 1991. "The informational role of prices : A review essay," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 347-361, October.
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