A Theory of Asset Prices Based on Heterogeneous Information

46 Pages Posted: 1 Feb 2013

See all articles by Elias Albagli

Elias Albagli

University of Southern California - Marshall School of Business; Central Bank of Chile

Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE)

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Multiple version iconThere are 3 versions of this paper

Date Written: January 2013

Abstract

With only minimal restrictions on security payoffs and trader preferences, noisy aggregation of heterogeneous information drives a systematic wedge between the impact of fundamentals on the price of a security, and the corresponding impact on cash flow expectations. From an ex ante perspective, this information aggregation wedge leads to a systematic gap between an asset's expected price and its expected dividend. The sign and magnitude of this expected wedge depend on the asymmetry between upside and downside payoff risks and on the importance of information heterogeneity. We consider three applications of our theory. We first show that predictions of our model provide a novel theoretical justification and are quantitatively consistent with documented empirical regularities on negative relationship between returns and skewness. Second, we illustrate how heterogeneous information leads to systematic departures from the Modigliani-Miller theorem and provide a new theory of debt versus equity. Third, we provide conditions under which permanent over- or under-pricing of assets is sustainable in a dynamic version of our model.

Keywords: asset prices, information aggregation, Modigliani-Miller Theorem, skewness

JEL Classification: D82, D84, G12, G14

Suggested Citation

Albagli, Elias and Hellwig, Christian and Tsyvinski, Aleh and Tsyvinski, Aleh, A Theory of Asset Prices Based on Heterogeneous Information (January 2013). CEPR Discussion Paper No. DP9291, Available at SSRN: https://ssrn.com/abstract=2210261

Elias Albagli (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States
56987096932 (Phone)

HOME PAGE: http://www.marshall.usc.edu/faculty/directory/albagli

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Aleh Tsyvinski

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
1,634
PlumX Metrics