'Market Efficiency with Micro and Macro Information'
We propose a tractable, multi-security model in which investors choose to acquire information about macro or micro fundamentals or remain uninformed. The model is solvable in closed form and yields a rich set of empirical predictions. Primary among these is an endogenous bias toward micro efficiency. A positive fraction of agents will always choose to be micro informed, but in some cases no agent will choose to be macro informed. Furthermore, for most reasonable choices of parameter values, prices will be more informative about micro than macro fundamentals. A key driver of our results is that only micro informed investors take the other side of idiosyncratic noise trading in individual stocks. We explore the model’s implications for systematic and idiosyncratic return volatility and trading volume, for excess covariance and volatility, and for the cyclicality of investor information choices.