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Have Financial Markets Become More Informative?

  • Jennie Bai
  • Thomas Philippon
  • Alexi Savov

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
Note: AP CF EFG ME
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