Surreal illustration of stock charts transforming into listening ears, symbolizing the blending of market noise, news, and information for investment analysis.

Decoding the Stock Market: What Really Drives Price Movements?

Avery Sinclair in Business & Economy June 2025 • 3 min read.

"A Fresh Look at News, Noise, and Information in the Financial Markets"

The question of what truly influences stock price movements has long been a central debate in finance. Understanding the factors that drive these changes is critical for evaluating risk, ensuring market efficiency, and accurately pricing assets. Is it the flow of public information, the whispers of private insights, or just random market noise that sends stocks soaring or plummeting?

Traditional methods of analyzing stock prices often fall short, either by overlooking the impact of market noise or by failing to distinguish between different types of information. Recent trends, such as the rise of passive investing and algorithmic trading, add further complexity. This makes it essential to develop more sophisticated tools to dissect the forces at play.

Recent research offers a new perspective by introducing a model that breaks down stock returns into four key components: market-wide information, private firm-specific information revealed through trading, public firm-specific information, and, crucially, market noise. By understanding these distinct elements, we can gain a clearer picture of what really makes the market tick.

The Four Pillars of Stock Price Movement

Surreal illustration of stock charts transforming into listening ears, symbolizing the blending of market noise, news, and information for investment analysis.

The new model decomposes stock price movements into market-wide information (the impact of broad economic trends), private firm-specific information (insights from those trading on insider knowledge), public firm-specific information (data from news and company announcements), and noise (temporary deviations caused by market pressures or irrational behavior).

The study reveals some surprising truths: Noise accounts for a significant 31% of return variance, highlighting how much stock prices are influenced by factors unrelated to fundamental value. Public firm-specific information is the most influential factor, accounting for 37% of variance, suggesting the importance of transparency and accessible data. Private firm-specific information accounts for 24%, while market-wide information only accounts for 8%.

Key findings from the research include:

Noise has decreased dramatically since the mid-1990s, indicating increased market efficiency.
Firm-specific information has become increasingly important over time.
Market-wide information has become a less significant driver of stock returns.

Further analysis reveals the impact of tick size (the minimum price increment for a stock) on market noise. When the tick size decreased, market noise also decreased, particularly for lower-priced stocks. This confirms that market structure and trading mechanics can significantly impact price efficiency.

Implications for Investors and Market Observers

By dissecting stock price movements into their core components, this research provides valuable insights for investors and market observers. Recognizing the significant role of market noise can temper reactions to short-term fluctuations, while understanding the increasing importance of firm-specific information underscores the value of in-depth company analysis. As markets continue to evolve, a nuanced understanding of these drivers becomes essential for making informed decisions.

About this Article -

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Everything You Need To Know

What are the key components that influence stock price movements?

Stock price movements are influenced by four key components: market-wide information, which reflects broad economic trends; private firm-specific information, derived from insider trading; public firm-specific information, based on news and company announcements; and market noise, caused by temporary market pressures or irrational behavior. Understanding these elements provides a clearer understanding of market dynamics.

What are the percentages of the key components that impact stock returns?

According to the study, public firm-specific information is the most influential factor, accounting for 37% of the variance in stock returns. This emphasizes the importance of transparency and accessible data. Noise accounts for a significant 31%, while private firm-specific information accounts for 24%, and market-wide information accounts for only 8%.

What trends have been observed in the influence of noise, firm-specific information, and market-wide information on stock returns since the mid-1990s?

Market noise has decreased dramatically since the mid-1990s, suggesting increased market efficiency. Firm-specific information has become increasingly important over time, reflecting a growing emphasis on company-specific fundamentals. Conversely, market-wide information has become a less significant driver of stock returns, indicating a reduced impact from broad economic trends.

How does tick size affect market noise, and what does this reveal about market structure and price efficiency?

The research indicates that when the tick size decreased, market noise also decreased, especially for lower-priced stocks. Tick size is the minimum price increment for a stock. This highlights that market structure and trading mechanics can significantly impact price efficiency. Smaller tick sizes reduce the potential for price manipulation and improve the accuracy of price discovery.

What implications does the new stock price movement model have for investors and market observers in making informed decisions?

By recognizing the significant role of market noise, investors can temper their reactions to short-term fluctuations. Understanding the increasing importance of firm-specific information underscores the value of in-depth company analysis. This approach enables more informed decisions and helps investors focus on fundamental value rather than being swayed by short-term market pressures.