Media Frenzies in Markets for Financial Information

Laura Veldkamp

No 4, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: Promising emerging equity markets often witness investment herds and frenzies, accompanied by an abundance of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the most popular information because it has the lowest price. Given two identical asset markets, investors herd: asset demand is higher in the market with abundant information because information reduces risk. By lowering risk, information raises the asset's price. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria raise price volatility and create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices

Keywords: Frenzies; herds; media (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-fin and nep-fmk
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Citations: View citations in EconPapers (8)

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Journal Article: Media Frenzies in Markets for Financial Information (2006)
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