Advance information and asset prices

Rui Albuquerque and Jianjun Miao

Journal of Economic Theory, 2014, vol. 149, issue C, 236-275

Abstract: This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information about future earnings that is unrelated to current earnings. In response to good advance information, stock prices increase and informed investors act as trend chasers, increasing their investment in stocks. Informed investors also buy other investment opportunities that are positively correlated with stocks, bearing more aggregate risk. The expected risk premium increases generating short-run momentum. Uninformed investors sell stocks, acting as contrarians. When the advance information materializes in the future, excess returns fall, generating long-run reversals.

Keywords: Advance information; Rational expectations equilibrium; Momentum and reversal effects (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Advance Information and Asset Prices (2008)
Working Paper: Advance Information and Asset Prices (2007)
Working Paper: Advance Information and Asset Prices
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:236-275

DOI: 10.1016/j.jet.2013.06.001

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