A Theory of Asset Prices based on Heterogeneous Information

Christian Hellwig, Aleh Tsyvinski and Elias Albagli

No 9291, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: With only minimal restrictions on security payoffs and trader preferences, noisy aggregation of heterogeneous information drives a systematic wedge between the impact of fundamentals on the price of a security, and the corresponding impact on cash flow expectations. From an ex ante perspective, this information aggregation wedge leads to a systematic gap between an asset's expected price and its expected dividend. The sign and magnitude of this expected wedge depend on the asymmetry between upside and downside payoff risks and on the importance of information heterogeneity. We consider three applications of our theory. We first show that predictions of our model provide a novel theoretical justification and are quantitatively consistent with documented empirical regularities on negative relationship between returns and skewness. Second, we illustrate how heterogeneous information leads to systematic departures from the Modigliani-Miller theorem and provide a new theory of debt versus equity. Third, we provide conditions under which permanent over- or under-pricing of assets is sustainable in a dynamic version of our model.

Keywords: Asset prices; Information aggregation; Modigliani-miller theorem; Skewness (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2013-01
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: A Theory of Asset Prices Based on Heterogeneous Information (2012)
Working Paper: A theory of asset prices based on heterogeneous information (2012)
Working Paper: A Theory of Asset Prices Based on Heterogeneous Information (2011)
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