Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information
AbstractWe analyze theoretically and empirically the implications of information asymmetry for equilibrium asset pricing and portfolio choice. In our partially revealing dynamic rational expectations equilibrium, portfolio separation fails, and indexing is not optimal. We show how uninformed investors should structure their portfolios, using the information contained in prices to cope with winner's curse problems. We implement empirically this price- contingent portfolio strategy. Consistent with our theory, the strategy outperforms economically and statistically the index. While momentum can arise in the model, in the data, the momentum strategy does not outperform the price-contingent strategy, as predicted by the theory. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 23 (2010)
Issue (Month): 4 (April)
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
Other versions of this item:
- Biais, Bruno & Bossaerts, Peter & Spatt, Chester, 2009. "Equilibrium Asset Pricing and Portofolio Choice Under Asymmetric Information," TSE Working Papers 09-018, Toulouse School of Economics (TSE).
- Biais, Bruno & Bossaerts, Peter & Spatt, Chester, 2009. "Equilibrium Asset Pricing and Portofolio Choice Under Asymmetric Information," IDEI Working Papers 474, Institut d'Économie Industrielle (IDEI), Toulouse.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Laura Veldkamp & Stijn Van Nieuwerburgh, 2005. "Information Acquisition and Portfolio Underdiversification," 2005 Meeting Papers 77, Society for Economic Dynamics.
- Spiegel, Matthew, 1998. "Stock Price Volatility in a Multiple Security Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 419-47.
- Shmuel Kandel & Robert F. Stambaugh, 1995.
"On the Predictability of Stock Returns: An Asset-Allocation Perspective,"
NBER Working Papers
4997, National Bureau of Economic Research, Inc.
- Kandel, Shmuel & Stambaugh, Robert F, 1996. " On the Predictability of Stock Returns: An Asset-Allocation Perspective," Journal of Finance, American Finance Association, vol. 51(2), pages 385-424, June.
- Bossaerts, Peter, 1995. "The Econometrics of Learning in Financial Markets," Econometric Theory, Cambridge University Press, vol. 11(01), pages 151-189, February.
- Michael J. Brennan. and H. Henry Cao., 1997.
"International Portfolio Investment Flows,"
Research Program in Finance Working Papers
RPF-271, University of California at Berkeley.
- Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
- Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
- Sanford J Grossman & Joseph E Stiglitz, 1997.
"On the Impossibility of Informationally Efficient Markets,"
Levine's Working Paper Archive
1908, David K. Levine.
- Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
- Masahiro Watanabe, 2002. "Rational Trend Followers and Contrarians in Excessively Volatile, Correlated Markets," Yale School of Management Working Papers ysm267, Yale School of Management.
- Stapleton, R C & Subrahmanyam, Marti G, 1978. "A Multiperiod Equilibrium Asset Pricing Model," Econometrica, Econometric Society, vol. 46(5), pages 1077-96, September.
- Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
- Mayers, David, 1974. "Portfolio theory, job choice and the equilibrium structure of expected wages," Journal of Financial Economics, Elsevier, vol. 1(1), pages 23-42, May.
- Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
- DeMarzo, Peter & Skiadas, Costis, 1998. "Aggregation, Determinacy, and Informational Efficiency for a Class of Economies with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 80(1), pages 123-152, May.
- Zhou, Chunsheng, 1998. "Dynamic portfolio choice and asset pricing with differential information," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 1027-1051, May.
- Maureen O'Hara, 2003. "Presidential Address: Liquidity and Price Discovery," Journal of Finance, American Finance Association, vol. 58(4), pages 1335-1354, 08.
- Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(04), pages 347-400, December.
- Michael Cooper & Roberto C. Gutierrez, Jr. & Bill Marcum, 2005. "On the Predictability of Stock Returns in Real Time," The Journal of Business, University of Chicago Press, vol. 78(2), pages 469-500, March.
- Kondor, Péter, 2011. "The more we know on the fundamental, the less we agree on the price," CEPR Discussion Papers 8455, C.E.P.R. Discussion Papers.
- Makarov, Igor & Rytchkov, Oleg, 2012. "Forecasting the forecasts of others: Implications for asset pricing," Journal of Economic Theory, Elsevier, vol. 147(3), pages 941-966.
- Calvet, Laurent-Emmanuel & Czellar , Veronika, 2011.
"state-observation sampling and the econometrics of learning models,"
Les Cahiers de Recherche
947, HEC Paris.
- Laurent E. Calvet & Veronika Czellar, 2011. "State-Observation Sampling and the Econometrics of Learning Models," Papers 1105.4519, arXiv.org.
- ap Gwilym, Rhys & Ebrahim, M. Shahid, 2013. "Can position limits restrain ‘rogue’ trading?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 824-836.
- Jayant Ganguli & Scott Condie, 2012.
"The pricing effects of ambiguous private information,"
Economics Discussion Papers
720, University of Essex, Department of Economics.
- Scott Condie & Jayant Ganguli, 2012. "The Pricing Effects of Ambiguous Private Information," INET Research Notes 16, Institute for New Economic Thinking (INET).
- Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
- Elías Albagli & Christian Hellwig & Aleh Tsyvinski, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," Working Papers Central Bank of Chile 720, Central Bank of Chile.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.