Data Abundance and Asset Price Informativeness

Résumé

Information processing filters out the noise in data but it takes time. Hence, lowprecision signals are available before high precision signals. To capture this feature,we develop a model of securities trading in which investors can acquire signals(about future cash flows) of increasing precision over time. As the cost of producinglow precision signals declines, prices are more likely to reflect these signals beforemore precise signals become available. This effect increases price informativenessin the short run but not necessarily in the long run, because it reduces the profitfrom trading on more precise signals. We make additional predictions for trade andprice patterns.