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The relationship between risk and expected returns with incomplete information

  • Germán López

    (Universidad de Navarra)

  • Joaquín Marhuenda

    (Universidad de Alicante)

  • Belén Nieto

    (Universidad de Alicante)

Asset pricing theory generally assumes perfect markets and, therefore, asset pricing models disregard the possibility of information deficiency in stock price formation. Our study analyses if the quantity of information about an asset determines its return. More precisely, we want to know if there is a systematic source of information related risk that makes assets which are highly sensitive to this risk factor present higher mean returns. Our results indicate that the market prices the disinformation risk. We find that models which incorporate our attention factor perform better than the traditional CAPM or the Fama and French model, both in time-series analyses and cross-sectionally.

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Article provided by Fundación SEPI in its journal Investigaciones Económicas.

Volume (Year): 33 (2009)
Issue (Month): 1 (January)
Pages: 69-96

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Handle: RePEc:iec:inveco:v:33:y:2009:i:1:p:69-96
Contact details of provider: Postal: Investigaciones Economicas Fundación SEPI Quintana, 2 (planta 3) 28008 Madrid Spain
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