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A Theory of Asset Pricing Based on Heterogeneous Information

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  • Elias Albagli
  • Christian Hellwig
  • Aleh Tsyvinski

Abstract

We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17548.

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Date of creation: Oct 2011
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Handle: RePEc:nbr:nberwo:17548

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References

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  1. Albagli, Elias & Hellwig, Christian & Tsyvinski, Aleh, 2011. "Information Aggregation, Investment, and Managerial Incentives," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8539, C.E.P.R. Discussion Papers.
  2. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(2), pages 109-128, Spring.
  3. Hong, Harrison & Sraer, David, 2013. "Quiet bubbles," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(3), pages 596-606.
  4. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  5. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1769-1787, December.
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Cited by:
  1. Marta Areosa & Waldyr Areosa, 2012. "Asset Prices and Monetary Policy – A sticky-dispersed information model," Working Papers Series, Central Bank of Brazil, Research Department 285, Central Bank of Brazil, Research Department.
  2. Elías Albagli & Christian Hellwig & Aleh Tsyvinski, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," Working Papers Central Bank of Chile, Central Bank of Chile 720, Central Bank of Chile.
  3. Ernesto Pasten, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," 2012 Meeting Papers, Society for Economic Dynamics 346, Society for Economic Dynamics.
  4. Tarek Alexander Hassan & Thomas Mertens, 2014. "Information Aggregation in a DSGE Model," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29 National Bureau of Economic Research, Inc.
  5. Jess Benhabib & Pengfei Wang, 2014. "Private Information and Sunspots in Sequential Asset Markets," NBER Working Papers 20044, National Bureau of Economic Research, Inc.

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