Liquidity runs with endogenous information acquisition

Abstract

This paper discusses a liquidity run model where investors optimally decide whether or not to acquire private information. This endogenizes the dichotomy "private information/no private information". The price of the information makes the equilibrium partitioning of the fundamentals two dimensional. For intermediate fundamentals multiplicity can be eliminated by the private information that investors can have. The dichotomy represents the information structures for low and high prices respectively. However, it presents a distorted view for intermediate prices and fundamentals for which unique equilibria without private information can occur. These results are preserved if the quality of the information is endogenized.

CHAPTER 1 The Financial Crisis of 2008

“…A relevant point for our chapter is that the amount of information in the market will depend, to large extent, on the efforts by investors and intermediaries to process data. A recent contribution by Zwart (2008) will help us understand how, starting with a situation of imperfect, noisy information, this could contribute to generate a run, and in turn the run will coincide with further loss of information.…”