Does more information in stock price lead to greater or smaller idiosyncratic return volatility?

Dong Wook Lee and Mark H. Liu

Journal of Banking & Finance, 2011, vol. 35, issue 6, 1563-1580

Abstract: We investigate the relation between price informativeness and idiosyncratic return volatility in a multi-asset, multi-period noisy rational expectations equilibrium. We show that the relation between price informativeness and idiosyncratic return volatility is either U-shaped or negative. Using several price informativeness measures, we empirically document a U-shaped relation between price informativeness and idiosyncratic return volatility. Our study therefore reconciles the opposing views in the following two strands of literature: (1) the growing body of research showing that firms with more informative stock prices have greater idiosyncratic return volatility, and (2) the studies arguing that more information in price reduces idiosyncratic return volatility.

Keywords: Idiosyncratic; volatility; Noisy; rational; expectations; equilibrium; Price; informativeness (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (44)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:6:p:1563-1580

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