This paper presents a dynamic asset-pricing model under asymmetric information. Investors have different information concerning the future growth rate of dividends. They rationally extract information from prices as well as dividends and maximize their expected utility. The model has a closed-form solution to the rational expectations equilibrium. The author finds that existence of uninformed investors increases the risk premium. Supply shocks can affect the risk premium only under asymmetric information. Information asymmetry among investors can increase price volatility and negative autocorrelation in returns. Less-informed investors may rationally behave like price chasers. Copyright 1993 by The Review of Economic Studies Limited.
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Volume (Year): 60 (1993) Issue (Month): 2 (April) Pages: 249-82 Download reference. The following formats are available: HTML
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