Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26491
Authors: 
Kovalenkov, Alexander
Vives, Xavier
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2446
Abstract: 
In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in each situation converge to each other at a rate of 1/N as the market becomes large. The approximation is particularly good when the informationally adjusted risk bearing capacity of traders is not very large. This is not the case if informed traders are close to risk neutral. Both equilibria converge to the competitive equilibrium of an idealized limit continuum economy as the market becomes large at a slower rate of 1/N and, therefore, the limit equilibrium need not be a good approximation of the strategic equilibrium in moderately large markets.
Subjects: 
Schizophrenia problem
strategic equilibrium
large markets
information acquisition
free entry
rate of convergence
JEL: 
C22
G10
G12
D41
D43
Document Type: 
Working Paper

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