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Imperfect Information and Stock Market Volatility

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  • Jeffrey R. Gerlach
Abstract
The purpose of this paper is to (1) develop a model to show how imperfect information can create excess volatility in asset returns and (2) provide empirical evidence consistent with the model. In this framework, variations in information quality cause the market prices to fluctuate more than the corresponding economic fundamentals. Using high‐frequency data from 1988 to 2002, the empirical evidence supports the predictions of the model by showing that economic volatility, defined as squared deviations of the quarterly gross domestic product (GDP) growth rate from its long‐run trend, can explain about half of the variation in S&P 500‐stock index quarterly volatility.

Suggested Citation

  • Jeffrey R. Gerlach, 2005. "Imperfect Information and Stock Market Volatility," The Financial Review, Eastern Finance Association, vol. 40(2), pages 173-194, May.
    • Handle: RePEc:bla:finrev:v:40:y:2005:i:2:p:173-194
    DOI: 10.1111/j.1540-6288.2005.00099.x
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    References listed on IDEAS

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    Cited by:

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    3. Smales, Lee A., 2016. "News sentiment and bank credit risk," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 37-61.
    4. Chronopoulos, Dimitris K. & Papadimitriou, Fotios I. & Vlastakis, Nikolaos, 2018. "Information demand and stock return predictability," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 59-74.

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