A Theory of Rational Investment Screens

37 Pages Posted: 3 Aug 2020

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania - Accounting Department; University of Pennsylvania

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department

Date Written: May 18, 2020

Abstract

We develop a model to explain the value and consequences of investment screens, which are commonly employed by sophisticated investors. In the model, some stock-market investors are uncertain about the quality of private information before they acquire it and, in equilibrium, rationally use prior prices and public information as a screen to predict the returns from information acquisition. We find that larger price surprises lead to more information acquisition, which implies higher future price volatility and trading volumes. We also highlight the determinants of the equilibrium value of investment screens, such as informed trade, noise trade, and public information.

Keywords: Information Acquisition, Investment Screens, Rational Expectations Equilibrium, Price Volatility

Suggested Citation

Fischer, Paul E. and Fischer, Paul E. and Heinle, Mirko Stanislav, A Theory of Rational Investment Screens (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3644532 or http://dx.doi.org/10.2139/ssrn.3644532

Paul E. Fischer

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University of Pennsylvania ( email )

PA
United States
215 573 7533 (Phone)

Mirko Stanislav Heinle (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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