Information tradeoffs in dynamic financial markets

Abstract

In dynamic financial markets the stochastic supply of risky assets has a significant informational role. Contrary to static models, where it acts as “noise,” in dynamic markets stochastic supply contains information about risk premiums. Acquiring private dividend information helps investors disentangle dividend information from discount-rate information contained in prices. For uninformed investors, however, as more informed investors enter the economy prices become more informative about dividends but less informative about discount rates. This tradeoff creates complementarities in information acquisition and multiple equilibria in the information market.