Advance Information and Asset Prices
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Boston University - Department of Economics
CEPR Discussion Paper No. DP6588
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.
Number of Pages in PDF File: 60
Keywords: advance information, momentum and reversal effects, overreaction, rational expectations equilibrium, underreaction
JEL Classification: G11, G12, G14working papers series
Date posted: June 9, 2008
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