Information Asymmetry, Market Participation, and Asset Prices

53 Pages Posted: 14 Apr 2016

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Chong Huang

University of California, Irvine - Paul Merage School of Business

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: April 12, 2016

Abstract

We derive a separation theorem: investors hold a common risk-adjusted market portfolio regardless of their information sets, and a portfolio based upon their private signals. This implies that investors have non-negligible holdings of assets they know little about, so nonparticipation remains a puzzle in a rational information setting. In contrast with the well-known prediction of a risk premium for nonparticipation, in our model risk premia satisfy the CAPM. Investors hold a fund that provides the risk-adjusted market portfolio, even if they are unaware of the fund’s composition. In contrast with a literature on information risk, there is no risk premium for information asymmetry.

Keywords: capital markets, stock market participation, information costs, information risk, information asymmetry, information risk, limited awareness, investor recognition

JEL Classification: G11, G12, D84

Suggested Citation

Hirshleifer, David A. and Huang, Chong and Teoh, Siew Hong, Information Asymmetry, Market Participation, and Asset Prices (April 12, 2016). 6th Miami Behavioral Finance Conference. Available at SSRN: https://ssrn.com/abstract=2763722 or http://dx.doi.org/10.2139/ssrn.2763722

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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