We develop a dynamic, rational expectations model of information and asset prices in which investor information choices influence the level of available public and private information about fundamentals. We posit that as more investors become informed, more information about fundamentals becomes available. Two regimes emerge, one with high prices and low volatility, and one with low prices and high 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. We also study alternative dynamics in which an increase in the number of informed investors leads to greater public disclosure; this mechanism has a stabilizing effect. When calibrated to market data, the first mechanism suggests a role for information dynamics in financial crises; the second mechanism helps explain empirical findings 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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