Citation

Discussion Paper Details

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Title: Advance Information and Asset Prices

Author(s): Rui Albuquerque and Jianjun Miao

Publication Date: November 2007

Keyword(s): advance information, momentum and reversal effects and rational expectations equilibrium

Programme Area(s): Financial Economics

Abstract: This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information that is useful for predicting future earnings, but is unrelated to current earnings. This information is immediately partially incorporated into stock prices. In response to good advance information, informed investors act as trend chasers and raise investments in both stocks and nontraded assets, leading them to bear more aggregate risk. This raises the expected risk premium and generates short-run momentum. Uninformed investors act as contrarians and sell stocks. When the advance information materializes in the future, excess returns fall, generating long-run reversals.

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Bibliographic Reference

Albuquerque, R and Miao, J. 2007. 'Advance Information and Asset Prices'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6588