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August 23, 2011 | History

Wall Street and Silicon Valley 1 edition

Cover of: Wall Street and Silicon Valley | Marios Angeletos

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Wall Street and Silicon Valley
a delicate interaction
George-Marios Angeletos, Guido Lorenzoni, Alessandro Pavan

Published 2007 by Massachusetts Institute of Technology, Dept. of Economics in Cambridge, MA .
Written in English.

About the Book

Financial markets look at data on aggregate investment for clues about underlying profitability. At the same time, firms' investment depends on expected equity prices. This generates a two-way feedback between financial market prices and investment. In this paper we study the positive and normative implications of this interaction during episodes of intense technological change, when information about new investment opportunities is highly dispersed. Because high aggregate investment is "good news" for profitability, asset prices increase with aggregate investment. Because firms' incentives to invest in turn increase with asset prices, an endogenous complementarity emerges in investment decisions - a complementarity that is due purely to informational reasons. We show that this complementarity dampens the impact of fundamentals (shifts in underlying profitability) and amplifies the impact of noise (correlated errors in individual assessments of profitability). We next show that these effects are symptoms of inefficiency: equilibrium investment reacts too little to fundamentals and too much to noise. We finally discuss policies that improve efficiency without requiring any informational advantage on the government's side. Keywords: heterogeneous information, complementarity, volatility, inefficiency, beauty contests.

Edition Notes

"September 23, 2007."

Includes bibliographic reference (p. 46-49).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.

Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 07-25, Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 07-25.

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49 p. :
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