Advance Information and Asset Prices

Albuquerque, Rui A.; Miao, Jianjun

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Advance Information and Asset Prices

CEPR Discussion Paper No. DP6588

60 Pages Posted: 9 Jun 2008

See all articles by Rui A. Albuquerque

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

There are 3 versions of this paper

Date Written: November 2007

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.

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

JEL Classification: G11, G12, G14

Suggested Citation: Suggested Citation

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