Uncertainty, Information Acquisition and Price Swings in Asset Markets

This paper studies asset markets where Knightian uncertainty about the fundamentals can be mitigated through costly information acquisition. In these markets, asset prices convey information that reduces risk but that at the same time, encapsulates much of the ambiguity underlying the market fundamentals. This ambiguity embedded in the asset price can dwarf the standard free-riding bene?t arising from others?information choices, and lead to strategic complementarities in information acquisition, resulting in multiple equilibria, history-dependent prices, and large price swings occurring even after small changes in uncertainty.

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