We develop a dynamic model of information and asset prices in which investor information choices influence the level of available public and private information about fundamentals. We study two types of feedback. In the first, as more investors become informed, more information about fundamentals becomes available. As a consequence, two regimes emerge, one with higher prices and lower volatility, and one with lower prices and higher volatility. Information dynamics move the market between regimes, creating large market drops and rallies, with no change in fundamentals, but large changes in discount rates reflecting changes in information asymmetry between informed and uninformed investors. In the second type of feedback we study, an increase in the number of informed investors leads to greater public information through leakage or disclosures; this mechanism has a stabilizing effect. When calibrated to market data, the positive feedback model suggests a role for information dynamics in financial crises; the negative feedback model helps explain empirical findings in the literature on the market reaction to the loss of analyst coverage.
Glasserman, Paul, Harry Mamaysky, and Yiwen Shen. "Dynamic Information Regimes in Financial Markets." Columbia Business School, January 28, 2019.
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