DP11190 Data Abundance and Asset Price Informativeness

Author(s): Jérôme Dugast, Thierry Foucault
Publication Date: March 2016
Keyword(s): Contrarian and momentum trading, Information Processing, Markets for Information, Price Informativeness
JEL(s):
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11190

Investors can acquire either raw or processed information about the payoff of risky assets. Information processing filters out the noise in raw information but it takes time. Hence, investors buying processed information trade with a lag relative to investors buying raw information. As the cost of raw information declines, more investors trade on it, which reduces the value of processed information, unless raw information is very unreliable. Thus, a decline in the cost of raw information can reduce the demand for processed information and, for this reason, the informativeness of asset prices in the long run.