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The Existence of Informationally Efficient Markets When Individuals Are Rational

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  • Marc-Andreas Muendler

Abstract

A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price - contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating functions, this paper shows that individual investors endowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without information acquisition are Pareto efficient.

Suggested Citation

  • Marc-Andreas Muendler, 2004. "The Existence of Informationally Efficient Markets When Individuals Are Rational," CESifo Working Paper Series 1295, CESifo.
    • Handle: RePEc:ces:ceswps:_1295
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    References listed on IDEAS

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    Cited by:

    1. Muendler, Marc-Andreas, 2005. "Rational Information Choice in Financial Market Equilibrium," University of California at San Diego, Economics Working Paper Series qt5q4764nj, Department of Economics, UC San Diego.

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    More about this item

    Keywords

    information; efficiency; financial markets; portfolio theory;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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