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Informational efficiency and welfare

Author

Listed:
  • Luca Bernardinelli
  • Paolo Guasoni

    (School of Mathematical Sciences, Dublin City University
    Università di Bologna)

  • Eberhard Mayerhofer

    (University of Limerick)

Abstract

In a continuous-time market with a safe rate and a risky asset that pays a dividend stream depending on a latent state of the economy, several agents make consumption and investment decisions based on public information–prices and dividends–and private signals. If each investor has constant absolute risk aversion, equilibrium prices do not reveal all the private signals, but lead to the same estimate of the state of the economy that one would hypothetically obtain from the knowledge of all private signals. Accurate information leads to low volatility, ostensibly improving market efficiency, but also reduces each agent’s consumption through a decrease in the price of risk. Thus, informational efficiency is reached at the expense of agents’ welfare.

Suggested Citation

  • Luca Bernardinelli & Paolo Guasoni & Eberhard Mayerhofer, 2022. "Informational efficiency and welfare," Mathematics and Financial Economics, Springer, volume 16, number 2, December.
    • Handle: RePEc:spr:mathfi:v:16:y:2022:i:4:d:10.1007_s11579-022-00319-3
    DOI: 10.1007/s11579-022-00319-3
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Equilibrium; Rational expectations; Heterogeneous information; Welfare;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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