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Advance information and asset prices

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  • Albuquerque, Rui
  • Miao, Jianjun

Abstract

This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information about future earnings that is unrelated to current earnings. In response to good advance information, stock prices increase and informed investors act as trend chasers, increasing their investment in stocks. Informed investors also buy other investment opportunities that are positively correlated with stocks, bearing more aggregate risk. The expected risk premium increases generating short-run momentum. Uninformed investors sell stocks, acting as contrarians. When the advance information materializes in the future, excess returns fall, generating long-run reversals.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 236-275

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:236-275

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Advance information; Rational expectations equilibrium; Momentum and reversal effects;

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Cited by:
  1. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
  2. Dimitri Vayanos & Paul Woolley, 2008. "An Institutional Theory of Momentum and Reversal," FMG Discussion Papers dp621, Financial Markets Group.
  3. Albuquerque, Rui, 2009. "Skewness in Stock Returns, Periodic Cash Payouts, and Investor Heterogeneity," CEPR Discussion Papers 7573, C.E.P.R. Discussion Papers.

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