Does more information in stock price lead to greater or smaller idiosyncratic return volatility?

Dong Wook Lee, Mark H. Liu

Research output: Contribution to journalArticlepeer-review

64 Scopus citations

Abstract

We investigate the relation between price informativeness and idiosyncratic return volatility in a multi-asset, multi-period noisy rational expectations equilibrium. We show that the relation between price informativeness and idiosyncratic return volatility is either U-shaped or negative. Using several price informativeness measures, we empirically document a U-shaped relation between price informativeness and idiosyncratic return volatility. Our study therefore reconciles the opposing views in the following two strands of literature: (1) the growing body of research showing that firms with more informative stock prices have greater idiosyncratic return volatility, and (2) the studies arguing that more information in price reduces idiosyncratic return volatility.

Original languageEnglish
Pages (from-to)1563-1580
Number of pages18
JournalJournal of Banking and Finance
Volume35
Issue number6
DOIs
StatePublished - Jun 2011

Keywords

  • Idiosyncratic volatility
  • Noisy rational expectations equilibrium
  • Price informativeness

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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