Abstract
This paper develops a non-linear rational expectations equilibrium (REE) solution for a class of economies under both asymmetric information and trading constraints. It then analyzes the properties of this equilibrium in a one-risky-asset economy with borrowing and shortsale constraints. The model suggests that 1) price informativeness varies with the price level; and 2) compared with an economy with borrowing constraints and information asymmetry, the asymmetry in large price movements is more pronounced in the presence of both constraints. A dynamic implication of this result is that crashes (large downward price movements) are formed much faster than bubbles (large upward price movements).
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