Advance Information and Asset Prices
Speaker
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 prices, and thus stock prices may move in ways unrelated to current fundamentals. Investors’ speculative and rebalancing trades in response to advance information generate short-run momentum, mimicking an underreaction pattern. When this information materializes, the stock price reverts back to its long-run mean, mimicking an overreaction pattern. Our model also helps explain the phenomenon of post-earnings announcement drift. |
| The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute. |
| Contact information: |
| Viorel Roscovan |
