An Information Framework for Measuring Perception Alignment in Financial Markets

At the onset of the COVID-19 pandemic, the CBOE volatility index reached new heights last experienced during the 2008 financial crisis. The consensus is that the World Health Organization’s announcement of the pandemic contributed to the high level of volatility. The question arises whether we have a potentially robust measure to quantify the degree to which investors’ perceptions were suddenly aligned about future asset returns due to a WHO announcement. This paper provides an information framework to measure the degree of perception alignment. We provide simulation examples and illustrate empirical evidence of financial market manipulation, and estimate the loss of information due to those cases of perception alignment.