Information Markets and the Comovement of Asset Prices

31 Pages Posted: 7 Nov 2008

See all articles by Laura Veldkamp

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: May 2004

Abstract

Traditional asset pricing models predict that covariance between prices of different assetsshould 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 fixedcosts, competitive producers charge more for low-demand information than for high-demandinformation. 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.

Keywords: Comovement, herding, information market, asset pricing

Suggested Citation

Veldkamp, Laura, Information Markets and the Comovement of Asset Prices (May 2004). NYU Working Paper No. S-MF-04-12, Available at SSRN: https://ssrn.com/abstract=1296384

Laura Veldkamp (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
57
Abstract Views
668
Rank
144,084
PlumX Metrics