Delegated Trade and the Pricing of Public and Private Information
61 Pages Posted: 11 Mar 2015 Last revised: 30 Aug 2015
Date Written: July 7, 2015
We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm's risk premium is a function of both the firm's exposure to a common risk factor and idiosyncratic characteristics of the firm's information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.
Keywords: delegated trade; institutional investors; imperfect competition; risk premium; expected returns; information quality; accounting quality; idiosyncratic risk; asset pricing tests
JEL Classification: G11, G12, G14, G31
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