Informational cascades with endogenous prices: The role of risk aversion

Abstract: In this paper, 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

Keywords: Informational cascades; Endogenous prices; Risk aversion (search for similar items in EconPapers)
Date: 2006-02
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Published in Journal of Mathematical Economics, 2006, 42 (1), pp.109-120. ⟨10.1016/j.jmateco.2005.03.002⟩

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Journal Article: Informational cascades with endogenous prices: The role of risk aversion (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00009853

DOI: 10.1016/j.jmateco.2005.03.002

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