Informational cascades with endogenous prices: the role of risk aversion. (English) Zbl 1142.91643
Summary: We show that long run market informational inefficiency and informational cascades can easily happen when trades occur at market clearing prices. We consider a sequential trade model where: (i) the investors’ set of actions is discrete; (ii) dealers and investors differ in risk aversion; (iii) investors’ information is bounded. We show that informational cascade occurs as soon as traders’ beliefs do not differ too sharply. Thus, prices cannot fully incorporate the private information dispersed in the economy.
MSC:
| 91B60 | Trade models |
| 91B24 | Microeconomic theory (price theory and economic markets) |
| 91B30 | Risk theory, insurance (MSC2010) |
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