Dynamic Information Regimes in Financial Markets
58 Pages Posted: 9 Feb 2019 Last revised: 27 Mar 2020
Date Written: March 26, 2020
We develop a model of investor information choices and asset prices in which the availability of information about fundamentals is time-varying. A competitive research sector produces more information when there are more investors willing to pay for that research. This feedback, from the number of investors willing to pay for information to more information production, generates two regimes in equilibrium, one having high prices and low volatility, the other the opposite. Information dynamics move the market between regimes, creating large price drops with no change in fundamentals. When calibrated to market data, the model suggests an important role for information dynamics in financial crises.
Keywords: asset pricing, information choice
JEL Classification: E32, G12, G14
Suggested Citation: Suggested Citation