What Moves Stock Prices? The Role of News, Noise, and Information
AFA Annual Meeting 2020, Forthcoming
69 Pages Posted: 29 Jan 2018 Last revised: 13 Sep 2019
Date Written: September 1, 2019
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. Overall, 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 and an increase in firm-specific information, consistent with increasing market efficiency.
Keywords: variance decomposition, firm-specific information, market-wide information, stock return synchronicity
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation