Equilibrium Data Mining and Data Abundance
48 Pages Posted: 27 Jan 2021 Last revised: 5 Jan 2022
Date Written: January 4, 2021
We propose a new theory of information production in financial markets. In this theory, speculators search for new predictors of asset payoffs and optimally decide to trade on predictors whose signal-to-noise ratio exceeds an endogenous threshold. We use the model to derive predictions regarding the effects of progress in information technologies on quantitative asset managers' performance, the similarity of their holdings, and the informativeness of asset prices. We show that data abundance (an expansion of the search space for predictors due to greater data diversity) and greater data processing power do not have the same effects.
Keywords: [comma Alternative Data; Data Abundance; Data Mining; Price Informativeness; Search for Information]
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