NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Crises and Prices: Information Aggregation, Multiplicity and Volatility

George-Marios Angeletos, Ivan Werning

NBER Working Paper No. 11015
Issued in December 2004
NBER Program(s):   EFG

Many argue that crises -- such as currency attacks, bank runs and riots -- can be described as times of non-fundamental volatility. We argue that crises are also times when endogenous sources of information are closely monitored and thus an important part of the phenomena. We study the role of endogenous information in generating volatility by introducing a financial market in a coordination game where agents have heterogeneous information about the fundamentals. The equilibrium price aggregates information without restoring common knowledge. In contrast to the case with exogenous information, we find that uniqueness may not be obtained as a perturbation from common knowledge: multiplicity is ensured when individuals observe fundamentals with small idiosyncratic noise. Multiplicity may emerge also in the financial price. When the equilibrium is unique, it becomes more sensitive to non-fundamental shocks as private noise is reduced.

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Document Object Identifier (DOI): 10.3386/w11015

Published: George-Marios Angeletos & Iván Werning, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December. citation courtesy of

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