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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26132
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| Title: | Information Markets and the Comovement of Asset Prices |
| Authors: | Veldkamp, Laura |
| Issue Date: | 31-Aug-2004 |
| Series/Report no.: | EC-04-18 |
| Abstract: | Traditional asset pricing models predict that covariance between prices
of different assets should be lower than what we observe in the data.
This model generates high covariance within a rational expectations
framework by introducing markets for information about asset payoffs.
When information is costly, rational investors will not buy information
about all assets; they will learn about a subset. Because information
production has high fixed costs, competitive producers charge more for
low-demand information than for high-demand information. A price that
declines in quantity makes investors want to purchase a common subset of
information. If investors price many assets using a common subset of
information, then a shock to one signal is passed on as a common shock
to many asset prices. These common shocks to asset prices generate
`excess covariance.' The cross-sectional and time-series properties of
asset price covariance are consistent with this explanation. |
| URI: | http://hdl.handle.net/2451/26132 |
| Appears in Collections: | Economics Working Papers
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