What Moves Stock Prices? The Role of News, Noise, and Information

Abstract

We develop a return variance decomposition model to separate the role of different types of information and noise in stock price movements. We disentangle four components: market-wide information, private firm-specific information revealed through trading, firm-specific information revealed through public sources, and noise. 31% of the return variance is from noise, 37% from public firm-specific information, 24% from private firm-specific information and 8% from market-wide information. Since the mid 1990s there has been a dramatic decline in noise. During this period firm-specific information is increasing, consistent with increasing market efficiency. Our findings help reconcile the mixed results in the R^2 literature.

Keywords: variance decomposition, firm-specific information, market-wide information, stock return synchronicity

JEL Classification: G12, G14, G15