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Advance Information and Asset Prices

  • Jianjun Miao

    (Boston University)

  • Rui Albuquerque

    (Boston University)

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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File URL: https://www.economicdynamics.org/meetpapers/2008/paper_44.pdf
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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 44.

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Date of creation: 2008
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Handle: RePEc:red:sed008:44
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