Media Frenzies in Markets for Financial Information

Abstract

Emerging equity markets witness occasional surges in the price level (frenzies) and increases in cross-market price dispersion (herds), accompanied by a flood of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the same information because it has the lowest price. By lowering risk, information raises the asset's price. Given two identical assets, investors herd: one price is higher because abundant information about that asset reduces its payoff risk. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices and higher cross-market price dispersion.