Information Difussion, Interdependence and Stock Market Comovement

Abstract

We explore how comovement in stock returns can be explained by firm-to-firm interdependence through informational links. Due to limited attention capacity, agents’ learning process is biased towards common information, which generates correlated beliefs about stock returns. This will generate interdependence across stock returns, and stock market comovement at an aggregate level. We use a novel measure for informational linkages between firms based on analysts forecast errors, estimate the relevance of this channel with a Spatial Two-Stage Least Square (S2SLS) estimator and find that the informational channel explains ``idiosyncratic’’ returns, has a lower intensity in periods of higher uncertainty, stands and is amplified when taking into account category-learning effects. We also study the propagation of climate events and simulated shocks in the stock market based on the estimated informational linkages and find quantitatively important indirect effects.