Advance Information and Asset Prices

Rui Albuquerque () and Jianjun Miao ()

No 6588, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: advance information; momentum and reversal effects; overreaction; rational expectations equilibrium; underreaction (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mst
Date: 2007-11
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