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ASYMMETRIC INFORMATION AND THE EXCESS VOLATILITY OF STOCK PRICES
Author(s) -
Eden Benjamin,
Jovanovic Boyan
Publication year - 1994
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1994.tb01326.x
Subject(s) - economics , dividend , volatility (finance) , stock (firearms) , information asymmetry , valuation (finance) , financial economics , public information , econometrics , monetary economics , microeconomics , finance , mechanical engineering , public administration , political science , engineering
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.