Media Frenzies in Markets for Financial Information

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. ∗NYU Stern School of Business, Economics Department, 44 West 4th Street, 7th floor, New York, NY 10012. email: [email protected]. Thanks to Xavier Vives, Tim Van Zandt, Thomas Sargent, John Leahy, Boyan Jovanovic, Andrew Rose, Bernard Dumas, Stijn Van Nieuwerburgh, Joe Chen, Pascal Maenhout, Hyun Shin, Paul Pfleiderer, Anat Admati, and seminar participants at NBER summer institute EF&G meeting, SED meetings, Texas, Wharton, UCSD, Duke Fuqua, Maryland, NYU, Yale, Carnegie Mellon, Pittsburgh, Federal Reserve, Stockholm IIES, Toulouse, Stanford, and INSEAD for helpful comments. Many thanks to Joël Peress for use of software he developed that made the news data collection possible, and to Yuan-Chuan Lien for excellent research assistance. JEL classification: D82, G14, G12.