55 Pages Posted: 24 Feb 2008 Last revised: 20 Aug 2015
Date Written: April 29, 2013
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: 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