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Media Frenzies in Markets for Financial Information

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Author Info
Laura Veldkamp

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Abstract

Promising emerging equity markets often witness investment herds and frenzies, accompanied by an abundance of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the most popular information because it has the lowest price. Given two identical asset markets, investors herd: asset demand is higher in the market with abundant information because information reduces risk. By lowering risk, information raises the asset's price. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria raise price volatility and create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 4.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:4

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Related research
Keywords: Frenzies; herds; media;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  15. V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Isaac Ehrlich & William A. Hamlen Jr. & Yong Yin, 2008. "Asset Management, Human Capital, and the Market for Risky Assets," NBER Working Papers 14340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Gadi Barlevy & Pietro Veronesi, 2007. "Information acquisition in financial markets: a correction," Working Paper Series WP-07-06, Federal Reserve Bank of Chicago. [Downloadable!]
  3. Laura Veldkamp & Justin Wolfers, 2006. "Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement," NBER Working Papers 12557, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Boyan Jovanovic & Peter L. Rousseau, 2004. "Interest Rates and Initial Public Offerings," NBER Working Papers 10298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Vasiliki Skreta & Laura Veldkamp, 2008. "Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation," Working Papers 08-28, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  7. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  8. Kelly, Bryan & Ljungqvist, Alexander P, 2009. "Testing Asymmetric-Information Asset Pricing Models," CEPR Discussion Papers 7180, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Boyan Jovanovic & Peter Rousseau, 2004. "Interest rates and the timing of new production," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-11. [Downloadable!]
  10. Marc-Andreas Muendler, 2005. "Rational Information Choice in Financial Market Equilibrium," University of California at San Diego, Economics Working Paper Series 2005-04, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  11. Elizabeth Demers & Clara Vega, 2008. "Soft information in earnings announcements: news or noise?," International Finance Discussion Papers 951, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Milo Bianchi & Philippe Jehiel, 2008. "Speculative Bubbles without Stupid Investors," Levine's Bibliography 122247000000002180, UCLA Department of Economics. [Downloadable!]
  13. Mark Bowden & Stuart McDonald, 2008. "The Impact of Interaction and Social Learning on Aggregate Expectations," Computational Economics, Springer, vol. 31(3), pages 289-306, April. [Downloadable!] (restricted)
  14. 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. [Downloadable!]
    Other versions:
  15. Jordi Mondria, 2006. "Financial Contagion and Attention Allocation," Working Papers tecipa-254, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  16. Spyros Pagratis, . "Asset pricing, asymmetric information and rating announcements: does benchmarking on ratings matter?," Bank of England working papers 265, Bank of England. [Downloadable!]
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