Volatility and Informativeness

Eduardo Davila and Cecilia Parlatore

No 25433, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the equilibrium relation between price volatility and price informativeness in financial markets, with the ultimate goal of characterizing the type of inferences that can be drawn about price informativeness by observing price volatility. We identify two different channels (noise reduction and equilibrium learning) through which changes in price informativeness are associated with changes in price volatility. We show that when informativeness is sufficiently high (low) volatility and informativeness positively (negatively) comove in equilibrium for any change in primitives. In the context of our leading application, we provide conditions on primitives that guarantee that volatility and informativeness always comove positively or negatively. We use data on U.S. stocks between 1963 and 2017 to recover stock-specific primitives and find that most stocks lie in the region of the parameter space in which informativeness and volatility comove negatively.

JEL-codes: D82 D83 G14 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-fmk
Note: AP EFG
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Citations: View citations in EconPapers (3)

Published as Eduardo Dávila & Cecilia Parlatore, 2023. "Volatility and informativeness," Journal of Financial Economics, vol 147(3), pages 550-572.

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Journal Article: Volatility and informativeness (2023)
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