Existence of Strongly Rational Expectations Equilibria on Asset Markets with Asymmetric Information”, mimeo

This paper analyzes conditions for rationalizability of rational expectations equilibria of asset market models with asymmetric information and learning from current prices. The game-theoretical concept of rationalizability is used in order to asses whether such rational expectations equilibria can be justified as the result of a mental process of reasoning of the traders. Following Guesnerie (1992) a rational expectations equilibrium is said to be eductively stable or strongly rational, if it is the unique rationalizable solution of the model. It is shown that a strongly rational expectations equilibrium in the well known asset market model of Grossman (1976) exists only if the equilibrium asset price is not too informative. As is shown, this existence condition requires in the end that the private signals of the traders are more informative regarding the unknown asset return than the asset price. Equivalent conditions are derived for a version of the model with a continuum of traders and also for a version with imperfect competition among a finite number of traders