Information Markets and the Comovement of Asset Prices
AbstractTraditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This paper introduces markets for information that generate high price covariance within a rational expectations framework. When information is costly, rational investors only buy information about a subset of the assets. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. The low price of high-demand information makes investors want to purchase the same information that others are purchasing. When investors price assets using a common subset of information, news about one asset affects the other assets' prices; asset prices comove. The cross-sectional and time-series properties of comovement are consistent with this explanation. Copyright 2006, Wiley-Blackwell.
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Bibliographic InfoArticle provided by Oxford University Press in its journal The Review of Economic Studies.
Volume (Year): 73 (2006)
Issue (Month): 3 ()
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Other versions of this item:
- Laura Veldkamp, 2004. "Information Markets and the Comovement of Asset Prices," Working Papers 04-18, New York University, Leonard N. Stern School of Business, Department of Economics.
- Laura Veldkamp, 2004. "Information Markets and the Comovement of Asset Prices," 2004 Meeting Papers 539, Society for Economic Dynamics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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