Information Tradeoffs in Dynamic Financial Markets
53 Pages Posted: 15 Mar 2012 Last revised: 5 Apr 2016
Date Written: March 1, 2016
In dynamic financial markets the stochastic supply of risky assets has a significant informational role. Contrary to static models, where it acts as “noise,” in dynamic markets stochastic supply contains information about risk premiums. Acquiring private dividend information helps investors disentangle dividend information from discount-rate information contained in prices. For uninformed investors, however, as more informed investors enter the economy prices become more informative about dividends but less informative about discount rates. This tradeoff creates complementarities in information acquisition and multiple equilibria in the information market.
Keywords: Information acquisition, Dynamic financial markets, Rational expectations, Market efficiency, Complementarities
JEL Classification: D53, D82, D84, G14
Suggested Citation: Suggested Citation