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Dynamic Information Regimes in Financial Markets

Author

Listed:
  • Paul Glasserman

    (Columbia Business School, New York, New York 10027)

  • Harry Mamaysky

    (Columbia Business School, New York, New York 10027)

  • Yiwen Shen

    (School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon 999077, Hong Kong)

Abstract

We develop a model of investor information choices and asset prices in which the availability of information about fundamentals is time-varying and responds to investor demand for information. A competitive research sector produces more information when more investors are willing to pay for that research. This feedback, from investor willingness to pay for information to more information production, generates two regimes in equilibrium, one having high prices and low volatility, the other the opposite. The low-price, high-volatility regime is associated with greater information asymmetry between informed and uninformed investors. Information dynamics move the market between regimes, creating large price drops even with no change in fundamentals. In our calibration, the model suggests an important role for information dynamics in financial crises.

Suggested Citation

  • Paul Glasserman & Harry Mamaysky & Yiwen Shen, 2024. "Dynamic Information Regimes in Financial Markets," Management Science, INFORMS, vol. 70(9), pages 6069-6092, September.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:9:p:6069-6092
    DOI: 10.1287/mnsc.2021.01213
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    References listed on IDEAS

    as
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