Information Disclosure of Rational Expectation Equilibrium and Dynamical Dynamics in Financial Market

Abstract

Abstract: Based on complexity of assets pricing, we analyze the implications of information disclosure and investigate the trading strategies and the market dynamics based on rational expectation equilibrium (REE) framework with Bayesian updating. Our results show that information disclosure weakens the information advantage of homologous informed traders and reduces the uncertainty faced by heterogeneous informed traders, which triggers the interaction of the trading intensity of two types of informed traders. Specifically, the direct "uncertainty reduction" effect leads to strategic complementary and the indirect "inference augmentation" effect leads to strategic substitutability. The information disclosure increases the threshold of strategic complementary, thereby reducing the adverse selection risk of the market and improving the stability of the financial system. Due to the self-organization phenomenon in financial markets, we also analyze the impact of public disclosure on market liquidity, price informativeness and the benefits of traders.

Key words: market dynamics, self-organizing principle, Bayesian equilibrium, strategic complementarity, strategic substitutability

Zhang Qiang, Gu Tao, Li Xiang, Liu Shancun. Information Disclosure of Rational Expectation Equilibrium and Dynamical Dynamics in Financial Market[J]. Management Review, 2020, 32(7): 191-204.

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