alt Hacker NewsIt seems like Bookstaber argues not that it's liquidity demand over information change, but that it is both. The tariff announcements are actually a great example, because it was triggered by new information, and diversification still kind of worked (at least some government bonds gained value during the drop in other assets classes).
The main question, I suppose, is why correlations were so high after the tariff announcements:
- In some cases, the high correlations are probably due to the markets being directly affected by the announcements: both commodities and equity are affected, and they got more correlated, which makes sense.
- In some cases, the high correlations are probably due to liquidity demand rather than markets being directly affected by the announcements: we would not expect cryptocurrencies to be directly affected by US tariffs, but they ended up correlated with equity markets anyway. That's probably because people needed to sell off their cryptocurrency to cover equity losses.
Thus in this case, it's again probably a bit of both.
Great paper. Thanks for referencing.
"was triggered by new information,"
Trump had been threatening tariffs for the campaign and mentioning them before. There wasn't that much new information that should have caused the plummet.
Also I will point out that it's more like the avoidance of information that caused some of it Nvidia's stock plunged on an announcement that went something like:
Sentence 1: we are putting tarrifs on Taiwan Sentence 2: except semiconductor related goods
It as if the market participants read sentence 1 and very few of us read sentence 2.
The EMH would assert that a casual observer like me wouldn't see the price gap between the time it took for people to read sentence 2. But it took several business days...