by
Myungkyu Shim, Shanghai University of Finance and Economics
Wednesday, May 18, 2016 | 2:00 - 3:30 PM | Room 337, HSBC Business School
Abstract
We uncover a novel interaction between strategic uncertainty in coordination
games of incomplete information - such as currency crises, bank runs and finan-
cial crises - and the informativeness of rational expectations equilibrium prices
in financial markets with risk averse traders: when the private information of
players in the coordination game is increased, the information conveyed by fi-
nancial prices falls. We use this property to show that, differently from what
argued by Angeletos and Werning (2006), information transmission from prices
in financial markets can be consistent with the emergence of a unique equilib-
rium in global games of regime change, exactly when the private information of
players in the game is sufficiently precise. In this sense, the original equilibrium
uniqueness result of Morris and Shin (1998) for global games is robust to the
introduction of endogenous information from financial markets.
