New research reveals how information affects market efficiency and investor returns.
The study shows that in markets where asset prices fully reflect all available information, individuals who are rational and seek financial information can still achieve equilibrium. By expanding on a common model and considering different types of distributions, the researchers found that investors who can adjust their portfolio size will demand information to maintain balance. However, having more information can reduce expected returns on risky assets, disadvantaging those with limited portfolio choices or assets different from the average. Overall, markets with fully revealing prices can be efficient for both those who acquire information and those who do not.