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Informational efficiency and welfare
Date
2022
Abstract
In a continuous-time market with a safe rate and a risky asset that pays a dividend stream depending on a latent state of the economy, several agents make consumption and investment decisions based on public information–prices and dividends–and private signals. If each investor has constant absolute risk aversion, equilibrium prices do not reveal all the private signals, but lead to the same estimate of the state of the economy that one would hypothetically obtain from the knowledge of all private signals. Accurate information leads to low volatility, ostensibly improving market efficiency, but also reduces each agent’s consumption through a decrease in the price of risk. Thus, informational efficiency is reached at the expense of agents’ welfare.
Supervisor
Description
Publisher
Springer
Citation
Mathematics and Financial Econimics, 16, 659–683
Collections
Files
Funding code
Funding Information
Open Access funding provided by IReL.