American Economic Review: Vol. 96 No. 3 (June 2006)
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Media Frenzies in Markets for Financial Information
Veldkamp, Laura L. 2006. "Media Frenzies in Markets for Financial Information." American Economic Review, 96(3): 577-601.
Emerging equity markets witness occasional surges in prices (frenzies) and crossmarket price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/highasset- price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion. (JEL D82, G12, G14)
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Veldkamp, Laura L.