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Advance Information and Asset Prices

59 Pages Posted: 17 Mar 2008 Last revised: 25 Sep 2012

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: September 25, 2012

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 that is useful for predicting future earnings, but is unrelated to current earnings. This information is immediately partially incorporated into stock prices. In response to good advance information, informed investors act as trend chasers and raise investments in both stocks and nontraded assets, leading them to bear more aggregate risk. This raises the expected risk premium and generates short-run momentum. Uninformed investors act as contrarians and sell stocks. When the advance information materializes in the future, excess returns fall, generating long-run reversals.

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

JEL Classification: G11, G12, G14

Suggested Citation

Albuquerque, Rui A. and Miao, Jianjun, Advance Information and Asset Prices (September 25, 2012). Available at SSRN: https://ssrn.com/abstract=1105064 or http://dx.doi.org/10.2139/ssrn.1105064

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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