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Asymmetric Information and the Excess Volatility to Stock Prices

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  • Eden, B.
  • Jovanovic, B.

Abstract

Evidence suggests the volatility of stock prices cannot be accounted for by information about future dividends. The authors argue that some of the volatility of stock prices in excess of fundamentals results from fluctuations in the amount of public information over time. Their model assumes that dividends and consumption are constant in the aggregate but that there are good firms and bad firms whose identity may be unknown to the public, as in George Akerlof's (1970) 'lemons' problem. In that case, the collective valuation of the constant dividend stream depends on the degree of informational asymmetry. Copyright 1994 by Oxford University Press.
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Suggested Citation

  • Eden, B. & Jovanovic, B., 1992. "Asymmetric Information and the Excess Volatility to Stock Prices," Working Papers 92-47, C.V. Starr Center for Applied Economics, New York University.
  • Handle: RePEc:cvs:starer:92-47
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    Citations

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    Cited by:

    1. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Chow, William W. & Fung, Michael K., 2008. "Volatility of stock price as predicted by patent data: An MGARCH perspective," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 64-79, January.
    3. S. Rao Aiyagari & Mark Gertler, 1999. ""Overreaction" of Asset Prices in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 3-35, January.
    4. Gharbi, Sami & Sahut, Jean-Michel & Teulon, Frédéric, 2014. "R&D investments and high-tech firms' stock return volatility," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 306-312.
    5. Campbell, John Y & Kim, Sangjoon & Lettau, Martin, 1998. "Dispersion and Volatility in Stock Returns: An Empirical Investigation," CEPR Discussion Papers 1923, C.E.P.R. Discussion Papers.
    6. repec:fth:starer:98-25 is not listed on IDEAS
    7. repec:cvs:starer:9825 is not listed on IDEAS
    8. repec:fth:starer:9825 is not listed on IDEAS
    9. Matthew Spiegel, 1996. "Stock Price Volatility in a Multiple Security Overlapping Generations Model," Finance 9608002, EconWPA.
    10. Crouzille, Celine & Lepetit, Laetitia & Tarazi, Amine, 2004. "Bank stock volatility, news and asymmetric information in banking: an empirical investigation," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 443-461.

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    Keywords

    information ; stock market ; prices;

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