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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, and information technology allows arbitrageurs to trade faster than ever. But have market prices then become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not improved since 1960. We use a model with information acquisition and investment to link financial development, price informativeness, and allocational efficiency. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and welfare. We find that this component has remained stable over the past 50 years. When we decompose price informativeness into real price efficiency and forecasting price efficiency, we find that both have remained stable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19728.

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Date of creation: Dec 2013
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Handle: RePEc:nbr:nberwo:19728

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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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.
  2. 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.
  3. Peter Koudijs, 2013. "'Those Who Know Most': Insider Trading in 18th c. Amsterdam," NBER Working Papers 18845, National Bureau of Economic Research, Inc.
  4. 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.

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