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Advance Information and Asset Prices

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  • Rui Albuquerque

    ()
    (CEPR and Boston University School of Management)

  • Jianjun Miao

    ()
    (Department of Economics, Boston University)

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 that is useful for predicting future earnings but is unrelated to current earnings. This information is immediately partially incorporated into prices, and thus stock prices may move in ways unrelated to current fundamentals. Investors' speculative and rebalancing trades in response to advance information generate short-run momentum, mimicking an underreaction pattern. When this information materializes, the stock price reverts back to its long-run mean, mimicking an overreaction pattern.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2009-017.

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Length: 53
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Handle: RePEc:bos:wpaper:wp2009-017

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Keywords: advance information; rational expectations equilibrium; underreaction; over-reaction; momentum and reversal effects;

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References

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Cited by:
  1. Dimitri Vayanos & Paul Woolley, 2008. "An institutional theory of momentum and reversal," LSE Research Online Documents on Economics 24423, London School of Economics and Political Science, LSE Library.
  2. Albuquerque, Rui, 2009. "Skewness in Stock Returns, Periodic Cash Payouts, and Investor Heterogeneity," CEPR Discussion Papers 7573, C.E.P.R. Discussion Papers.
  3. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.

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