Advance Information and Asset Prices

Rui Albuquerque and Jianjun Miao

No wp2009-017, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

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 that is useful for predicting future earnings but is unrelated to current earnings. This information is immediately partially incorporated into prices, and thus stock prices may move in ways unrelated to current fundamentals. Investors' speculative and rebalancing trades in response to advance information generate short-run momentum, mimicking an underreaction pattern. When this information materializes, the stock price reverts back to its long-run mean, mimicking an overreaction pattern.

Keywords: advance information; rational expectations equilibrium; underreaction; over-reaction; momentum and reversal effects (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 53
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Related works:
Journal Article: Advance information and asset prices (2014)
Working Paper: Advance Information and Asset Prices (2008)
Working Paper: Advance Information and Asset Prices (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2009-017

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