Skip navigation

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.
Appears in Collections:Economics Working Papers

Files in This Item:
File Description SizeFormat 
4-18.pdf264.68 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.