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Does more information in stock price lead to greater or smaller idiosyncratic return volatility?

  • Lee, Dong Wook
  • Liu, Mark H.
Registered author(s):

    We investigate the relation between price informativeness and idiosyncratic return volatility in a multi-asset, multi-period noisy rational expectations equilibrium. We show that the relation between price informativeness and idiosyncratic return volatility is either U-shaped or negative. Using several price informativeness measures, we empirically document a U-shaped relation between price informativeness and idiosyncratic return volatility. Our study therefore reconciles the opposing views in the following two strands of literature: (1) the growing body of research showing that firms with more informative stock prices have greater idiosyncratic return volatility, and (2) the studies arguing that more information in price reduces idiosyncratic return volatility.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 6 (June)
    Pages: 1563-1580

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:6:p:1563-1580
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Lubos Pastor & Pietro Veronesi, 2002. "Stock Valuation and Learning about Profitability," NBER Working Papers 8991, National Bureau of Economic Research, Inc.
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    9. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
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    16. Thapa, Chandra & Poshakwale, Sunil S., 2010. "International equity portfolio allocations and transaction costs," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2627-2638, November.
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    18. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
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