rational panics and stock market crashes abstract this paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders we show that uninformed traders can precipitate a price crash because as prices decline they surmise that informed traders received negative information which leads them to reduce their demand for assets and drive the price of stocks even lower the model yields several implications such as that crashes can occur even when the fundamentals are strong and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

big data in finance and the growth of large firms abstract two modern economic trends are the increase in firm size and advances in information technology we explore the hypothesis that big data disproportionately benefits big firms because they have more economic activity and a longer firm history large firms have produced more data as processor speed rises abundant data attracts more financial analysis data analysis improves investors forecasts and reduces equity uncertainty reducing the firm s cost of capital when investors can process more data large firm investment costs fall by more enabling large firms to grow larger

financial markets the real economy and self fulfilling uncertainties we develop a model of informational interdependence between financial markets and the real economy linking economic uncertainty to information production and aggregate economic activities in general equilibrium the mutual learning between financial markets and the real economy creates a strategic complementarity in their information production leading to self fulfilling surges in economic uncertainties in a dynamic setting our model characterizes self fulfilling uncertainty traps with two steady state equilibria and a two stage economic crisis in transitional dynamics

determinacy of equilibrium in stationary economies with both finite and infinite lived consumers abstract we consider the determinacy of perfect foresight equilibrium near steady state equilibria of stationary infinite horizon economies the work of t j kehoe and d k levine econometrica 53 1985 433 453 is generalized by the inclusion of both infinite lived agents and overlapping generations of finite lived agents and the inclusion of production and non depreciating pure rents we show that indeterminacy is possible in robust examples and that the dimension of the indeterminacy can be as large as the number of goods per period we also discuss extreme cases in which determinacy is guaranteed

value added taxation in the ec after 1992 abstract this paper examines the quantitative effects of the transitional system of value added taxation for intra ec trade between 1993 and 1997 as recently adopted by the ecofin council first the administration of the current destination principle and the interim solution are described a short representation of the empirical general equilibrium model featuring seven ec regions and 14 production sectors follows finally the effects of a switch to the transitional system are evaluated by using numerical simulations the adopted provisions with regard to cross frontier sales to final consumers open tax arbitrage possibilities which favour low tax countries at the cost of their ec partners when decomposing welfare effects international tax revenue shifts prove to dominate while substitution effects have relatively little influence on economic welfare

should we regulate financial information regulations that require asset issuers to disclose payoff relevant information to potential buyers sound like obvious measures to increase investor welfare but in many cases such regulations harm investors in an equilibrium model asset returns compensate investors for risk by making payoffs less uncertain disclosure reduces risk and therefore reduces return as high risk high return investments disappear investor welfare falls of course information is still valuable to each individual investor but acquiring information is like a prisoners dilemma each investor is better off with the information but collectively investors are better off if they remain uninformed the only cases in which providing information improves investors welfare are ones where there would otherwise be severe asymmetric information using a model of information markets the paper explores when such outcomes are likely to arise when we extend the model so that financial markets with information allocate the real capital stock more efficiently these conclusions do not change disclosure improves efficiency but more efficient firms do not have more risk and therefore do not offer investors higher return instead they simply command a higher price which only benefits the asset issuer since the efficiency gains are fully internalized by asset issuers who can choose to disclose without disclosure being mandatory the efficiency argument is not a logical rationale for regulation

public information and coordination evidence from a credit registry expansion this paper provides evidence that lenders to a firm close to distress have incentives to coordinate lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing to isolate the coordination channel from lenders joint reaction to new information we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers we show that lenders while learning nothing new about the firm reduce credit in anticipation of other lenders reaction to the negative news about the firm the results show that public information exacerbates lender coordination and increases the incidence of firm financial distress

insider trading outside search and resource allocation why firms and society may disagree on insider trading restrictions we show that entrepreneurs may prefer to allow insider trading even when it is not socially optimal we examine a model in which an insider manager allocates resources on the basis of his private information and outside information conveyed through the secondary market price of the firm s shares if the manager is allowed to trade he will compete with informed outsiders reducing the equilibrium quality of outside information while the benefits to production of outside information are the same for society and entrepreneurs we show that the social and private costs are different thus entrepreneurs and society may disagree on the conditions under which insider trading restrictions should be imposed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

how do market prices and cheap talk affect coordination in many scenarios such as banking and liquidity crises inefficiencies often arise because investors face uncertainties about economic fundamentals and the strategies of other investors how information affects fundamental uncertainty is well studied but how information affects strategic uncertainty is underexplored this paper examines how two communication mechanisms market and cheap talk affect investment decisions and efficiency in an experimental investment game with both fundamental and strategic uncertainty i find that the market does not improve coordination because the expectation that coordination failures will occur is self fulfilling while cheap talk improves coordination because the signals of willingness to invest alleviate strategic uncertainty

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

asymmetric price movements and borrowing constraints a rational expectations equilibrium model of crises contagion and confusion this study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints consistent with empirical observations the model finds 1 crises can be caused by small shocks to fundamentals 2 market return distributions are asymmetric and 3 correlations among asset returns tend to increase during crashes the model also predicts 1 crises and contagion are likely to occur after small shocks in the intermediate price region 2 the skewness of asset price distributions increases with information asymmetry and borrowing constraints and 3 crises can spread through investor borrowing constraints

on existence and uniqueness of equilibrium in a class of noisy rational expectations models i study a general class of noisy rational expectations models that nests the standard grossman and stiglitz 1980 and hellwig 1980 models but relaxes the usual assumption of joint normality of asset pay offs and supply and allows for more general signal structures i provide a constructive proof of existence of equilibrium characterize the price function and provide sufficient conditions for uniqueness within the class of equilibria with continuous price functions which are met by both the grossman and stiglitz 1980 models and the hellwig 1980 models with a continuum of investors my solution approach does not rely on the typical conjecture and verify method and i exhibit a number of non normal examples in which asset prices can be characterized explicitly and in a closed form the results presented here open up a broad class of models for applied work to illustrate the usefulness of generalizing the standard model i show that in settings with non normally distributed pay offs shocks to fundamentals may be amplified purely due to learning effects price drifts can arise naturally and the disagreement return relation depends in a novel way on return skewness

learning and complementarities in speculative attacks we study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision we show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non fundamental volatility into exchange rates and policy decisions we show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market and that transparency may either increase or decrease the effectiveness of learning from the market depending on how it is implemented

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally

liability insurance under the negligence rule we analyze the e ciency properties of the negligence rule with liability insurance when the tort feasor s behavior is imperfectly observable both by the insurer and the court e ciency is shown to depend on the extent to which the evidence is informative on the evidentiary standard for nding negligence and on whether insurance contracts can condition directly on the same evidence as used by courts to assess behavior when evidence is not directly contractible the negligence rule with compensatory damages is generally ine cient

the informational content of prices when policy makers react to financial markets abstract when can policy makers use policy relevant information from financial market prices and how does policy affect price informativeness i analyze a novel setting with noise where a policy maker tries to infer information about a state variable from prices to improve policy decisions and policy in turn affects asset values i derive a necessary and sufficient condition for the possibility of information revelation in equilibrium which might not be possible if the policy reaction to prices punishes traders for revealing their information if the policy maker is uninformed then policy objectives do not change price informativeness but they do if the policy maker has independent information about the state i also analyze policy maker transparency and find that policy makers with objectives having a large impact on asset values should publish their information before trading to make prices more informative in other cases intransparency can be optimal

learning asymmetries in real business cycles when a boom ends the downturn is generally sharp and short when growth resumes the boom is more gradual our explanation rests on learning about productivity when agents believe productivity is high they work invest and produce more more production generates higher precision information when the boom ends precise estimates of the slowdown prompt decisive reactions investment and labor fall sharply when growth resumes low production yields noisy estimates of recovery noise impedes learning slows recovery and makes booms more gradual than downturns a calibrated model generates growth rate asymmetry similar to macroeconomic aggregates fluctuations in agents forecast precision match observed countercyclical errors of forecasters

comparative statics and perfect foresight in infinite horizon economies does a pure exchange economy with an infinite time horizon have determinate perfect foresight equilibria when there is a finite number of infinitely lived agents equilibria are generically determinate this is not true with overlapping generations of finitely lived agents we ask whether the initial conditions together with the requirement of convergence to a steady state locally determine an equilibrium price path in this framework there are many economies with isolated equilibria many with continua of equilibria and many with no equilibria at all with two or more goods in every period not only can the price level be indeterminate but relative prices as well furthermore such indeterminacy can occur whether or not there is fiat money and whether or not the equilibria are pareto efficient this paper considers whether infinite horizon economies have determinate perfect foresight equilibria this question is of crucial importance if instead equilibria are locally indeterminate not only are we unable to make comparative static predictions but the agents in the model are unable to determine the consequences of unanticipated shocks the idea underlying perfect foresight is that agents expectations should be the actual future sequence predicted by the model if the model does not make determinate predictions the concept of perfect foresight is meaningless we consider two extreme cases the first with a finite number of infinitely lived consumers and the second with an infinite number of finitely lived consumers an overlapping generations model both are models of stationary pure exchange economies no production including the storage of goods between periods can occur these models are unrealistic but are the easiest to study extensions of the results of this paper to models with production infinitely lived assets and mixtures of the two types of consumers are presented by muller and woodford 29 when there is a finite number of infinitely lived consumers we argue that equilibria are generically determinate this is because the effective number of equations determining equilibria is not infinite but equal to the number of agents minus one and must determine the marginal utility of income for all but one agent generically near an equilibrium these equations are independent and exactly determine the unknowns when there are infinitely many overlapping generations this reasoning breaks down an infinite number of equations is not necessarily sufficient to determine

financial system architecture this article builds a theory of financial system architecture we ask what is a financial market what is a bank and what determines the economic role of each starting with basic assumptions about primitives the types of agents and the nature of the informational asymmetries we provide a theory that explains which agents coalesce to form banks and which trade in the capital market it is shown that borrowers of higher observable qualities access the financial market moreover a financial system in its infancy will be bank dominated and increased financial market sophistication diminishes bank lending article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

coordinated bubbles and crashes abstract in a market with information friction investors strategically consider the actions of others and evolutionarily switch between fundamental and technical strategies to maximize their payoffs the collective actions of all investors exert feedback on asset price which affects investors subsequent actions we find that investors have the incentive to adopt fundamental strategy to restore market efficiency only if the mispricing is sufficiently large when investors fail to coordinate on the fundamental strategy market inefficiency increases which blows the bubble as market inefficiency grows the coordination on fundamental strategy strengthens which eventually bursts the bubble

speculative attacks with multiple sources of public information we propose a speculative attack model in which agents receive multiple public signals it is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post this process defines players private value the main result is to show that equilibrium uniqueness depends on two conditions i signals are sufficiently dispersed ii private beliefs about the relative precision of these signals sufficiently differ we derive some implications for information dissemination policy transparency in this context is multi dimensional it concerns the publicity of announcements the number of signals disclosed as well as their precision especially it seems that the central bank has better not publishing its forecast errors in order to maintain stability an illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

trading frenzies and their impact on real investment we study a model in which a capital provider learns from the price of a firm s security in deciding how much capital to provide for new investment this feedback effect from the financial market to the investment decision gives rise to trading frenzies in which speculators all wish to trade like others generating large pressure on prices coordination among speculators is sometimes desirable for price informativeness and investment efficiency but speculators incentives push in the opposite direction so that they coordinate exactly when it is undesirable we analyze the effect of various market parameters on the likelihood of trading frenzies to arise

ex post liability for harm vs ex ante safety regulation substitutes or complements this paper concerns the regulation of hazardous economic activities economists have generally viewed ex ante regulations safety standards pigouvian fees that regulate an activity before an accident occurs as substitutes for ex post policies exposure to tort liability for correcting extemalities this paper shows that where there is uncertainty there are inefficiencies associated with the exclusive use of negligence liability and that ex ante regulation can correct the inefficiencies in such a case it is efficient to set the safety standard below the level of precaution that would be called for if the standard were used alone jel 619

exemption versus zero rating a hidden problem of vat abstract we examine the difference between exemptions and zero rating under a consumption based vat in a numerical general equilibrium model to allow for a better understanding of the accruing efficiency effects we first develop a method to convert the nominal vat rates into effective tax rates on categories of final demand then we show how these effective tax rates can be used to perform a gradual transition from exemption to zero rating

the going public decision and the development of financial markets this paper explores the linkages between stock price efficiency the choice between private and public financing and the development of capital markets in emerging economies generally the advantage of public financing is high if costly information is diverse and cheap to acquire and if investors receive valuable information without cost the value of public firms generally depends on public market size which implies that there can be a positive externality associated with going public so that an inferior equilibrium can exist where too few firms go public the model is consistent with empirical observations on financial market development

a general equilibrium analysis of the 1986 tax reform in spain spain s recent entry into the european economic community eec has been accompanied by a number of economic reforms needed to comply with requirements imposed on a11 member countries a key ingredient of these reforms has been the introduction on i january 1986 of a vaiue added tax vat on consumption as a substitute for a complex range of indirect taxes including a turnover tax applied at every stage of the production process the fiscal reform has posed a number of interesting policy questions for instance one common criticism of the new tax system is that its rates have been chosen too high and will further depress the economy whose oflicial unemployment rate was 22 in 1985 government officials are very concerned however with the effect of the new tax system on public revenues and in turn on the substantial deficit of the public sector which was 8 of gdp in 1985 another current debate centers on whether the new tax system has a detrimental impact on the capital labor ratio due to the retention of social security taxes which are taxes on the use of labor in this paper we use an applied general equilibrium model of the spanish economy to analyze the impacts of the indirect tax reform on relative prices resource allocation and income distribution using the information contained in the social accounting matrix constructed by kehoe et al 1985 in the next section we describe the model placing emphasis on its novel features in

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

posturing and holdup in innovation we show that the need to posture can help solve the holdup problem inherent in many multistage relationships including those between entrepreneurs and venture capitalists posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees suppliers customers or competitors to develop maintain relationships with the firm or take other actions that increase firm value in the venture capital context this can be credibly achieved if the vc publicly invests at high prices in later rounds this tempers holdup by shifting ex post bargaining power toward the entrepreneur inducing him to exert greater effort

feedback effects and asset prices feedback effects from asset prices to firm cash flows have been empirically documented this finding raises a question for asset pricing how are asset prices determined if price affects fundamental value which in turn affects price in this environment by buying assets that others are buying investors ensure high future cash flows for the firm and subsequent high returns for themselves hence investors have an incentive to coordinate which may generate self fulfilling beliefs and multiple equilibria using insights from global games we pin down investors beliefs analyze equilibrium prices and show that strong feedback leads to higher excess volatility

deconstructing a mortgage meltdown a methodology for decomposing underwriting quality technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending which is reflected in rising foreclosure rates we develop a methodology for decomposing the trend in mortgage performance in the national serviced portfolio into a part due to economic conditions and a part due to underwriting changes the decomposition provides natural metrics or indices of underwriting quality and economic conditions the results suggest that the recent mortgage debacle can be attributed about equally to each factor the relaxation in observable credit standards is not monotonic while the easing of important risk characteristics like loan to value ratios in the early 1990s was arguably deliberate the negative effects of lower standards was masked by strong local and national economic conditions after 2000 there was little change in observable loan characteristics nevertheless loan performance continued to erode even after controlling for the economic environment we present evidence that the erosion in the latter period must have arisen from underwriting covariates that are typically unobservable to investors in securitizations this evidence is consistent with the hypothesis that moral hazard in non agency securitizations of mortgages particularly subprime and alt a loans caused underwriting risks to be mispriced

endogenous information acquisition in coordination games in the context of a beauty contest coordination game in which payoffs 1 depend on the quadratic distance of actions from an unobserved state variable and 2 from the average action players choose how much costly attention to pay to vari 3 ous informative signals each signal has an underlying accuracy how precisely it 4 identifies the state and a clarity how easy it is to understand the unique linear 5 equilibrium has interesting properties the signals which receive attention are the 6 clearest available even if they have poor underlying accuracy the number of sig 7 nals observed falls as the complementarity of players actions rises and if actions 8 are more complementary the information endogenously acquired in equilibrium 9 is more public in nature the consequences of rational inattention constraints on 10

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

endogenous cycles in a stiglitz weiss economy the literature on financial imperfections and business cycles has focused onpropagation mechanisms in this paper we model a purereversion mechanism such that the economy may converge to a two period equilibrium cycle this mechanism confirms that financial imperfections may have a dramatic amplification effect unlike in some related models contracts are complete indexation is not assumed away the welfare properties of a possible stabilizing policy are analyzed the model itself is a dynamic extension of the well known stiglitz weiss model of lending under moral hazard although stylized the model still captures some important features of credit cycles

information production dilution costs and optimal security design abstract we investigate the problem of a firm wishing to finance a project by issuing securities under asymmetric information we find that when outside investors can produce noisy information on the firm s quality the degree of information asymmetry resulting in equilibrium is endogenous and depends on the information sensitivity of the security issued thus in contrast to the prediction of the pecking order theory see e g myers and majluf j financial econom 13 1984 187 a security with low sensitivity to private information such as debt does not always dominate one with high information sensitivity such as equity a firm s preference for equity rather than debt depends on the costs of information production the precision of the information production technology and the extent of the information asymmetry we also study the optimal security design problem and find that depending on the cost and precision of the information production technology risky debt or a composite security with a convex payoff emerges as optimal securities

informational frictions and commodity markets this paper develops a model with a tractable log linear equilibrium to analyze the effects of informational frictions in commodity markets by aggregating dispersed information about the strength of the global economy among goods producers whose production has complementarity commodity prices serve as price signals to guide producers production decisions and commodity demand our model highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices our analysis illustrates the weakness common in empirical studies on commodity markets of assuming that different types of shocks are publicly observable to market participants