The relationship between risk and expected returns with incomplete information

Germán López-Espinosa (), Joaquín Marhuenda and Belén Nieto
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Joaquín Marhuenda: Universidad de Alicante
Belén Nieto: Universidad de Alicante

Investigaciones Economicas, 2009, vol. 33, issue 1, pages 69-96

Abstract: 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.

Keywords: Incomplete information; attention by financial analysts and information differential. (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2009

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