Market Efficiency with Micro and Macro Information

57 Pages Posted: 29 Jun 2016 Last revised: 30 Mar 2017

Paul Glasserman

Columbia Business School

Harry Mamaysky

Columbia University - Columbia Business School

Date Written: March 29, 2017

Abstract

We propose a tractable, multi-security model in which investors choose to acquire information about macro or micro fundamentals or remain uninformed. The model is solvable in closed form and yields a rich set of empirical predictions. Primary among these is an endogenous bias toward micro efficiency. A positive fraction of agents will always choose to be micro informed, but in some cases no agent will choose to be macro informed. Furthermore, for most reasonable choices of parameter values, prices will be more informative about micro than macro fundamentals. The key friction in our model is the assumption that uninformed investors cannot make costless inferences from individual stock prices. We explore the model's implications for the cyclicality of investor information choices, for systematic and idiosyncratic return volatility, and for excess covariance and volatility.

Keywords: Asset Management; Investment; Information; Asset Pricing; Volatility; Attention

JEL Classification: G1, G12, G14, G2, G23, G24

Suggested Citation

Glasserman, Paul and Mamaysky, Harry, Market Efficiency with Micro and Macro Information (March 29, 2017). Columbia Business School Research Paper No. 16-45. Available at SSRN: https://ssrn.com/abstract=2801700 or http://dx.doi.org/10.2139/ssrn.2801700

Paul Glasserman

Columbia Business School ( email )

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New York, NY 10027
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212-854-4102 (Phone)
212-316-9180 (Fax)

Harry Mamaysky (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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