Equilibrium Asset Pricing Under Heterogeneous Information

36 Pages Posted: 9 Jun 2004

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Peter Bossaerts

University of Melbourne - Department of Finance

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Date Written: March 15, 2004

Abstract

We analyze theoretically and empirically the implications of heterogeneous information for equilibrium asset pricing and portfolio choice. Our theoretical framework, directly inspired by Admati (1985), implies that with partial information aggregation, portfolio separation fails, buy-and-hold strategies are not optimal, and investors should structure their portfolios using the information contained in prices in order to cope with winner's curse problems. We implement empirically such a price-contingent portfolio allocation strategy and show that it outperforms economically and statistically the passive/indexing buy-and-hold strategy. We thus demonstrate that prices reveal information, in contrast with the homogeneous information CAPM, but only partially, consistent with a Noisy Rational Expectations Equilibrium. The success of our pricecontingent strategy does not proxy for the success of trading strategies based purely on historical performance, such as momentum investment.

Suggested Citation

Biais, Bruno and Bossaerts, Peter L. and Spatt, Chester S., Equilibrium Asset Pricing Under Heterogeneous Information (March 15, 2004). EFA 2004 Maastricht Meetings Paper No. 5083; 13th Annual Utah Winter Finance Conference; AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=354384 or http://dx.doi.org/10.2139/ssrn.354384

Bruno Biais (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Peter L. Bossaerts

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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