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Information acquisition and asset price volatility

Seungjun Baek

Finance Research Letters, 2022, vol. 46, issue PA

Abstract: I provide a channel by which information cost affects asset price volatility. Asset payoffs depend on two exogenous states, an unknown state about which buyers obtain costly information and a known state at the time of trading. Whereas the price of an asset with a higher information cost shows less sensitivity in response to changes in an unknown state, the asset price exhibits excess volatility in response to a known shock. This can explain how a small liquidty shock causes large fluctuations in asset markets.

Keywords: Asset price volatility; Information acquisition; Securities markets (search for similar items in EconPapers)
JEL-codes: D83 G10 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321002932

DOI: 10.1016/j.frl.2021.102236

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