A Theory of Asset Pricing Based on Heterogeneous Information
AbstractWe 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.
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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17548.
Date of creation: Oct 2011
Date of revision:
Note: AP CF EFG
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-CBA-2011-11-07 (Central Banking)
- NEP-MAC-2011-11-07 (Macroeconomics)
- NEP-UPT-2011-11-07 (Utility Models & Prospect Theory)
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.:
- Hong, Harrison & Stein, Jeremy, 2007.
"Disagreement and the Stock Market,"
2894690, Harvard University Department of Economics.
- Christian Hellwig & Arijit Mukherji & Aleh Tsyvinski, 2005.
"Self-Fulfilling Currency Crises: The Role of Interest Rates,"
NBER Working Papers
11191, National Bureau of Economic Research, Inc.
- Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
- Albagli, Elias & Hellwig, Christian & Tsyvinski, Aleh, 2011.
"Information Aggregation, Investment, and Managerial Incentives,"
CEPR Discussion Papers
8539, C.E.P.R. Discussion Papers.
- Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "Information Aggregation, Investment, and Managerial Incentives," Levine's Working Paper Archive 786969000000000197, David K. Levine.
- Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "Information Aggregation, Investment, and Managerial Incentives," Cowles Foundation Discussion Papers 1816, Cowles Foundation for Research in Economics, Yale University.
- Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "Information Aggregation, Investment, and Managerial Incentives," NBER Working Papers 17330, National Bureau of Economic Research, Inc.
- Harrison Hong & David Sraer, 2012.
NBER Working Papers
18547, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
- Tarek A. Hassan & Thomas M. Mertens, 2014. "Information Aggregation in a DSGE Model," NBER Working Papers 20193, National Bureau of Economic Research, Inc.
- Jess Benhabib & Pengfei Wang, 2014. "Private Information and Sunspots in Sequential Asset Markets," NBER Working Papers 20044, National Bureau of Economic Research, Inc.
- Ernesto Pasten, 2012.
"Rational Inattention, Multi-Product Firms and the Neutrality of Money,"
2012 Meeting Papers
346, Society for Economic Dynamics.
- Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile 664, Central Bank of Chile.
- Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2014.
"Dynamic Dispersed Information and the Credit Spread Puzzle,"
NBER Working Papers
19788, National Bureau of Economic Research, Inc.
- 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.
- Marta Areosa & Waldyr Areosa, 2012. "Asset Prices and Monetary Policy – A sticky-dispersed information model," Working Papers Series 285, Central Bank of Brazil, Research Department.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.