Advance Information and Asset Prices

55 Pages Posted: 24 Feb 2008 Last revised: 20 Aug 2015

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Jianjun Miao

Boston University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 29, 2013

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

JEL Classification: G11, G12, G14

Suggested Citation

Albuquerque, Rui A. and Miao, Jianjun, Advance Information and Asset Prices (April 29, 2013). Journal of Economic Theory, Vol. 149, 2014. Available at SSRN: https://ssrn.com/abstract=1096691 or http://dx.doi.org/10.2139/ssrn.1096691

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

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

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