ASYMMETRIC INFORMATION AND THE EXCESS VOLATILITY OF STOCK PRICES

Benjamin Eden, Boyan Jovanovic

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Evidence suggests the volatility of stock prices cannot be accounted for by information about future dividends. We argue that some of the volatility of stock prices in excess of fundamentals results from fluctuations in the amount of public information over time. Our model assumes that dividends and consumption are constant in the aggregate but that there are good firms and bad firms whose identity may be unknown to the public, as in Akerlof's “lemons” problem. In that case, the collective valuation of the constant dividend stream depends on the degree of informational asymmetry.

    Original languageEnglish (US)
    Pages (from-to)228-235
    Number of pages8
    JournalEconomic Inquiry
    Volume32
    Issue number2
    DOIs
    StatePublished - Apr 1994

    ASJC Scopus subject areas

    • Business, Management and Accounting(all)
    • Economics and Econometrics

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