Measuring Private Information in a Rational Expectations Framework

46 Pages Posted: 12 Sep 2007

See all articles by Radu Burlacu

Radu Burlacu

University of Grenoble 2 - ESA - CERAG

Patrice C. Fontaine

Eurofidai (CNRS)

Sonia G. Jimenez-Garcès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

Date Written: September 6, 2007

Abstract

This paper assesses the extent of stock asymmetric information by considering the relationship between stock returns and prices. We generalize Grossman, Sanford J. and Joseph E. Stiglitz model (1980) in a multi-asset setting and show that larger asymmetric information engenders stronger, negative correlation between assets' returns and prices. We propose an asymmetric information measure called AIM,which exploits this result. The empirical analysis shows that common stocks with higher AIM exhibit superior returns, confirming that investors require a premium for information risk. These results are robust to asset pricing models, asymmetric information measures, analyses periods, and variables known to affect stock returns.

Keywords: asymmetric information, private information, information-risk premium, rational expectations equilibrium models, price informativeness

JEL Classification: G12, G14, M41, D82

Suggested Citation

Burlacu, Radu and Fontaine, Patrice C. and Jimenez-Garcès, Sonia G., Measuring Private Information in a Rational Expectations Framework (September 6, 2007). Available at SSRN: https://ssrn.com/abstract=1012616 or http://dx.doi.org/10.2139/ssrn.1012616

Radu Burlacu

University of Grenoble 2 - ESA - CERAG ( email )

Grenoble
France

Patrice C. Fontaine (Contact Author)

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058
France

Sonia G. Jimenez-Garcès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG) ( email )

150 rue de la Chimie, BP47
GRENOBLE CEDEX, 38040
France

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