IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2011-033.html
   My bibliography  Save this paper

Conformism and Public News

Author

Listed:
  • Ms. Celine Rochon
  • Gabriel Desgranges

Abstract

We study a model where investment decisions are based on investors’ information about the unknown and endogenous return of the investment. The information of investors consists of endogenously determined messages sold by financial analysts who have access to both public and private information on the return of the investment. We assume that the return of the investment is correlated with the aggregate investment. This results into a beauty contest among analysts (or a "conformism" effect). In equilibrium, analysts sell all the information they have to all the investors. A striking result is that there are sometimes multiple equilibria. There are equilibria where the beauty contest is exacerbated. Because of the correlation across analysts' information sources, not all the information available in the economy is transmitted to investors.

Suggested Citation

  • Ms. Celine Rochon & Gabriel Desgranges, 2011. "Conformism and Public News," IMF Working Papers 2011/033, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/033
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24635
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    2. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    3. Amil Dasgupta & Andrea Prat & Michela Verardo, 2005. "The Price of Conformism," Levine's Bibliography 784828000000000357, UCLA Department of Economics.
    4. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 79-90.
    5. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    6. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "The Price Impact of Institutional Herding," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 892-925.
    7. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2023. "Wall Street and Silicon Valley: A Delicate Interaction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(3), pages 1041-1083.
    8. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    9. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, vol. 82(5), pages 1254-1278, December.
    10. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
    11. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    12. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, July.
    13. Jeffery Amato & Hyun Shin, 2006. "Imperfect common knowledge and the information value of prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 213-241, January.
    14. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
    15. 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.
    16. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    17. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-1430, November.
    18. Stephen Morris, 2002. "Coordination, Communication, and Common Knowledge: A Retrospective on the Electronic-mail Game," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 18(4), pages 433-445.
    19. C. Clark & Mattias Polborn, 2006. "Information and crowding externalities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 565-581, April.
    20. Ottaviani, Marco & Sorensen, Peter, 2001. "Information aggregation in debate: who should speak first?," Journal of Public Economics, Elsevier, vol. 81(3), pages 393-421, September.
    21. Peter Sorensen & Marco Ottaviani, 2000. "Herd Behavior and Investment: Comment," American Economic Review, American Economic Association, vol. 90(3), pages 695-704, June.
    22. Ho-Mou Wu & Wen-Chung Guo, 2004. "Asset price volatility and trading volume with rational beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 795-829, May.
    23. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    24. Hiroyuki Nakata, 2007. "A Model of Financial Markets with Endogenously Correlated Rational Beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 431-452, March.
    25. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    26. Amil Dasgupta & Andrea Prat, 2005. "Reputation and Asset Prices: A Theory of Information Cascades and Systematic Mispricing," Levine's Bibliography 784828000000000368, UCLA Department of Economics.
    27. Dasgupta, Amil & Prat, Andrea, 2008. "Information aggregation in financial markets with career concerns," Journal of Economic Theory, Elsevier, vol. 143(1), pages 83-113, November.
    28. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    29. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August.
    30. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-770, September.
    31. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    32. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-928, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gaetano Gaballo, 2018. "Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 1070-1110.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gabriel Desgranges & Celine Rochon, 2008. "Conformism, Public News and Market Effciency," OFRC Working Papers Series 2008fe16, Oxford Financial Research Centre.
    2. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    3. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    4. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    5. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    6. Rudiger, Jesper & Vigier, Adrien, 2013. "Financial Experts, Asset Prices and Reputation," MPRA Paper 51784, University Library of Munich, Germany.
    7. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    8. Gabriel Desgranges & Maik Heinemann, 2008. "Strongly Rational Expectations Equilibria,Endogenous Acquisition of Information and the Grossman–Stiglitz Paradox," THEMA Working Papers 2008-25, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    9. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
    10. Angeletos, George-Marios & La’O, Jennifer, 2009. "Incomplete information, higher-order beliefs and price inertia," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 19-37.
    11. Mordecai Kurz, 2007. "Rational Diverse Beliefs and Economic Volatility," Discussion Papers 06-045, Stanford Institute for Economic Policy Research.
    12. Bing Han & Liyan Yang, 2013. "Social Networks, Information Acquisition, and Asset Prices," Management Science, INFORMS, vol. 59(6), pages 1444-1457, June.
    13. Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
    14. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.
    15. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    16. Qi Chen & Zeqiong Huang & Yun Zhang, 2014. "The Effects of Public Information with Asymmetrically Informed Short‐Horizon Investors," Journal of Accounting Research, Wiley Blackwell, vol. 52(3), pages 635-669, June.
    17. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    18. Pingyang Gao, 2008. "Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 785-807, September.
    19. Wilhelm Jr, William J & Chen, Zhaohui, 2005. "The Industrial Organization of Financial Market Information Production," CEPR Discussion Papers 5314, C.E.P.R. Discussion Papers.
    20. Angus A Brown & L C G Rogers, 2010. "Diverse Beliefs," Papers 1001.1450, arXiv.org.

    More about this item

    Keywords

    WP; monopolistic competition;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2011/033. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.