Staff Reports
Information Acquisition and Financial Intermediation
September 2012  Number 571
Revised June 2014
JEL classification: G12, G19, E44, G00

Author: Nina Boyarchenko

Informational advantages of specialists relative to households lead to disagreement between the two in an intermediated market. Although households can acquire additional signals to reduce the informational asymmetry, the additional information is costly, making it rational for households to limit the accuracy of the signals they observe. I show that this leads the equity capital constraint to bind more frequently, making the asset prices in the economy more volatile unconditionally. When disagreement between households and specialists is high, however, return volatility decreases. I find empirical evidence consistent with these predictions.

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