“Uncertainty, Information Acquisition and Price Swings in Asset Markets” by Antonio Mele
London School of Economics
Stockholm School of Economics
This paper studies asset markets where Knightian uncertainty about the fundamentals can be mitigated through costly information acquisition. In these markets, investors' information choices can be strategic complements, resulting in multiple equilibria, history-dependent prices, and large price swings occurring after small changes in uncertainty. Our model predicts the typical market responses to an uncertainty shock: a crash, followed by a sustained rally, which the model generates due to the information complementarities. Our model highlights uncertainty as a new channel for episodes of extreme price volatility and media frenzies.