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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)

Jianjun Miao


Boston University - Department of Economics
November 2007

CEPR Discussion Paper No. DP6588

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.

Number of Pages in PDF File: 60

Keywords: advance information, momentum and reversal effects, overreaction, rational expectations equilibrium, underreaction

JEL Classification: G11, G12, G14

working papers series


Date posted: June 9, 2008  

Suggested Citation

Albuquerque, Rui A. and Miao, Jianjun, Advance Information and Asset Prices (November 2007). CEPR Discussion Paper No. DP6588. Available at SSRN: http://ssrn.com/abstract=1140517

Contact Information

Rui A. Albuquerque (Contact Author)
Boston University - School of Management ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
HOME PAGE: http://people.bu.edu/ralbuque/
Católica-Lisbon School of Business and Economics ( email )
Caminho da Palma de Cima
Lisbon, 1649-023
Portugal
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Jianjun Miao
Boston University - Department of Economics ( email )
270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)
HOME PAGE: http://people.bu.edu/miaoj
Feedback to SSRN (Beta)


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References:  28
Citations:  5

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