Media Frenzies in Markets for Financial Information

39 Pages Posted: 31 Oct 2008

See all articles by Laura Veldkamp

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2003

Abstract

Promising emerging equity markets often witness investment herds and frenzies, accompanied by an abundance of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the most popular information because it has the lowest price. Given two identical asset markets, investors herd: asset demand is higher in the market with abundant information because information reduces risk. By lowering risk, information raises the asset's price. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria raise price volatility and create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices.

Keywords: Crashes, herding, information market, media

Suggested Citation

Veldkamp, Laura, Media Frenzies in Markets for Financial Information (August 2003). NYU Working Paper No. EC-03-20, Available at SSRN: https://ssrn.com/abstract=1292640

Laura Veldkamp (Contact Author)

Columbia University - Columbia Business School ( email )

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New York, NY 10027
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National Bureau of Economic Research (NBER)

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United States

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