Title: | Information Markets and the Comovement of Asset Prices |
Authors: | Veldkamp, Laura L.. |
Keywords: | Comovement;herding;information market;asset pricing |
Issue Date: | 17-May-2004 |
Series/Report no.: | S-MF-04-12 |
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 this 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/2451/26833 |
Appears in Collections: | Macro Finance |
Files in This Item:
File | Description | Size | Format | |
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S-MF-04-12.pdf | 254.3 kB | Adobe PDF | View/Open |
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