Media Frenzies in Markets for Financial Information
American Economic Review · 2006 · Volume 96 · Issue 3
Abstract
Emerging equity markets witness occasional surges in prices (frenzies) and crossmarket price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/highasset- price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion. (JEL D82, G12, G14)
Keywords
Asset Pricing, Trading Volume, Bond Interest Rates, Information and Market Efficiency, Event Studies, Insider Trading, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance, Socialist Institutions and Their Transitions: Financial Economics
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