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Advance Information and Asset Prices

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Author Info
Albuquerque, Rui
Miao, Jianjun

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Abstract

This paper provides an explanation for momentum and reversal in stock returns within a rational expectations framework in which investors are heterogeneous in their information and investment opportunities. We assume that informed agents privately receive advance information about company earnings that materializes into the future. While this information is immediately incorporated into prices, stock prices underreact to it causing short-run momentum. Stock prices may appear to move in ways unrelated to current fundamentals. When the information materializes, the stock price reverts back to its long run mean mimicking an overreaction pattern.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6588.

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Date of creation: Nov 2007
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Handle: RePEc:cpr:ceprdp:6588

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Related research
Keywords: advance information; momentum and reversal effects; overreaction; rational expectations equilibrium; underreaction;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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Cited by:
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  1. Dimitri Vayanos & Paul Woolley, 2008. "An Institutional Theory of Momentum and Reversal," NBER Working Papers 14523, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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