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Have financial markets become more informative?

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  • Jennie Bai
  • Thomas Philippon
  • Alexi Savov

Abstract

The finance industry has grown. Financial markets have become more liquid. Information technology has improved. But have prices become more informative? Using stock and bond prices to forecast earnings, we find that the information content of market prices has not increased since 1960. The magnitude of earnings surprises, however, has increased. A baseline model predicts that as the efficiency of information production increases, prices become more disperse and covary more strongly with future earnings. The forecastable component of earnings improves capital allocation and serves as a direct measure of welfare. We find that this measure has remained stable. A model with endogenous information acquisition predicts that an increase in fundamental uncertainty also increases informativeness as the incentive to produce information grows. We find that uncertainty has indeed increased outside of the S&P 500, but price informativeness has not.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 578.

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Date of creation: 2012
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Handle: RePEc:fip:fednsr:578

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Keywords: Financial markets ; Prices ; Information technology ; Investments ; Stock - Prices ; Uncertainty;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. All that financial innovation has not lead to more transparency
    by Economic Logician in Economic Logic on 2014-01-15 15:39:00
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Cited by:
  1. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.
  2. Peter Koudijs, 2013. "'Those Who Know Most': Insider Trading in 18th c. Amsterdam," NBER Working Papers 18845, National Bureau of Economic Research, Inc.
  3. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.
  4. Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.

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