News, Influence, and the Evolution of Prices in Financial Markets

63 Pages Posted: 25 Jun 2014

See all articles by Shmuel Baruch

Shmuel Baruch

University of Rome Tor Vergata, Department of Economics and Finance

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Xiaodi Zhang

Shanghai University of Finance and Economics

Date Written: June 24, 2014

Abstract

Opinions by experts and media pundits that are widely disseminated in various media forms (both traditional outlets and online venues) constitute a major source of influence on investors. While a published view could be more accurate than the view of a typical investor, its influence displaces many independent views and hence has the potential to introduce a shared error. Our objective is to study the influence of published views on the evolution of prices by constructing a theoretical model and using empirical work to test and calibrate the model. Our probabilistic trading model demonstrates how the influence of published views creates patterns in prices and volume. Still, a "wisdom of the crowds" effect emerges endogenously in our framework and helps expunge such shared errors from the price. We use the timing of earnings announcements to test our model, and find evidence consistent with the theoretical predictions. The magnitude of the empirical effects is then used to calibrate the model, and our calibration exercise suggests that while the published opinion has only a modest degree of influence, its exact accuracy matters somewhat less than the extent of its influence.

Keywords: news, influence, media, wisdom of the crowds, pricing errors, earnings announcements

JEL Classification: G14

Suggested Citation

Baruch, Shmuel and Saar, Gideon and Zhang, Xiaodi, News, Influence, and the Evolution of Prices in Financial Markets (June 24, 2014). Available at SSRN: https://ssrn.com/abstract=2458569 or http://dx.doi.org/10.2139/ssrn.2458569

Shmuel Baruch

University of Rome Tor Vergata, Department of Economics and Finance ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Xiaodi Zhang

Shanghai University of Finance and Economics ( email )

School of Finance
Shanghai
China

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