Identifying Price Informativeness

44 Pages Posted: 5 Nov 2018

See all articles by Eduardo Davila

Eduardo Davila

New York University (NYU); National Bureau of Economic Research (NBER)

Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business

Date Written: November 2018

Abstract

We show that outcomes (parameter estimates and R-squareds) of regressions of prices on fundamentals allow us to recover exact measures of the ability of asset prices to aggregate dispersed information. Formally, we show how to recover absolute and relative price informativeness in dynamic environments with rich heterogeneity across investors (regarding signals, private trading needs, or preferences), minimal distributional assumptions, multiple risky assets, and allowing for stationary and non-stationary asset payoffs. We implement our methodology empirically, finding stock-specific measures of price informativeness for U.S. stocks. We find a right-skewed distribution of price informativeness, measured in the form of the Kalman gain used by an external observer that conditions its posterior belief on the asset price. The recovered mean and median are 0.05 and 0.02 respectively. We find that price informativeness is higher for stocks with higher market capitalization and higher trading volume.

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Suggested Citation

Davila, Eduardo and Parlatore, Cecilia, Identifying Price Informativeness (November 2018). NBER Working Paper No. w25210. Available at SSRN: https://ssrn.com/abstract=3278510

Eduardo Davila (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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National Bureau of Economic Research (NBER) ( email )

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Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.ceciliaparlatore.com

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