IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Information Diversity and Market Efficiency Spirals

  • Liyan Yang

    (Joseph L. Rotman School of Management,)

  • Itay Goldstein

    (University of Pennsylvania)

Registered author(s):

    We analyze a model where the value of a traded security is affected by two different fundamentals, e.g., the quality of the firm's technology and the demand for its products, and where there are two groups of informed traders, each one informed about a different fundamental. We analyze the interaction between the informativeness of the price about the two fundamentals and characterize when it leads to attenuation and when it leads to amplification of shocks to market efficiency. Amplification occurs because the informativeness about one fundamental reduces the uncertainty in trading on information about the other fundamental and encourages traders to trade more aggressively on such information. This effect is dominant when the informativeness of the price is relatively balanced between the two fundamentals, which implies that economies with more diverse information -- i.e., where the information is more evenly distributed between the two groups -- will exhibit positive externalities and have higher levels of overall market efficiency. Finally, we endogenize the incentives for information production and show that the above effect leads to strategic complementarities in information production.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: https://economicdynamics.org/meetpapers/2012/paper_349.pdf
    Download Restriction: no

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 349.

    as
    in new window

    Length:
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:red:sed012:349
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
    Email:


    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:red:sed012:349. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.