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Advance Information and Asset Prices

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  • Albuquerque, Rui
  • Miao, Jianjun

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

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References

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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, 2013. "An Institutional Theory of Momentum and Reversal," Review of Financial Studies, Society for Financial Studies, vol. 26(5), pages 1087-1145.
  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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