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Advance information and asset prices

  • Albuquerque, Rui
  • Miao, Jianjun

This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information about future earnings that is unrelated to current earnings. In response to good advance information, stock prices increase and informed investors act as trend chasers, increasing their investment in stocks. Informed investors also buy other investment opportunities that are positively correlated with stocks, bearing more aggregate risk. The expected risk premium increases generating short-run momentum. Uninformed investors sell stocks, acting as contrarians. When the advance information materializes in the future, excess returns fall, generating long-run reversals.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053113001178
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 236-275

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:236-275
DOI: 10.1016/j.jet.2013.06.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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