Media Frenzies in Markets for Financial Information

Media Frenzies in Markets for Financial Information Abstract Emerging equity markets witness occasional surges in prices (frenzies) and cross-market 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/high-asset-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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Media Frenzies in Markets for Financial Information

American Economic Review, Volume 96 (3) – Jun 1, 2006

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Publisher
American Economic Association
Copyright
Copyright © 2006 by the American Economic Association
Subject
Articles
ISSN
0002-8282
DOI
10.1257/aer.96.3.577
Publisher site
See Article on Publisher Site

Abstract

Abstract Emerging equity markets witness occasional surges in prices (frenzies) and cross-market 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/high-asset-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.

Journal

American Economic ReviewAmerican Economic Association

Published: Jun 1, 2006

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