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Advance Information and Asset Prices

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  • Jianjun Miao

    (Boston University)

  • Rui Albuquerque

    (Boston University)

Abstract

This paper provides an explanation for momentum and reversal in stock returns within a rational expectations framework in which investors are heterogeneous in their information and investment opportunities. We assume that informed agents privately receive advance information about company earnings that materializes into the future. While this information is immediately incorporated into prices, stock prices underreact to it causing short-run momentum. Stock prices may appear to move in ways unrelated to current fundamentals. When the information materializes, the stock price reverts back to its long run mean mimicking an overreaction pattern.

Suggested Citation

  • Jianjun Miao & Rui Albuquerque, 2008. "Advance Information and Asset Prices," 2008 Meeting Papers 44, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:44
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    4. Li, Kai, 2021. "Nonlinear effect of sentiment on momentum," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    5. He Huang, 2019. "How Does Information Transmission Influence the Value Creation Capability of a Digital Ecosystem? An Empirical Study of the Crypto-Digital Ecosystem Ethereum," Sustainability, MDPI, vol. 11(19), pages 1-16, September.
    6. Ichkitidze, Yuri, 2018. "Temporary price trends in the stock market with rational agents," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 103-117.
    7. Albuquerque, Rui, 2009. "Skewness in Stock Returns, Periodic Cash Payouts, and Investor Heterogeneity," CEPR Discussion Papers 7573, C.E.P.R. Discussion Papers.
    8. M. Max Croce & Tatyana Marchuk & Christian Schlag, 2019. "The Leading Premium," NBER Working Papers 25633, National Bureau of Economic Research, Inc.
    9. Andrei, Daniel & Cujean, Julien, 2017. "Information percolation, momentum and reversal," Journal of Financial Economics, Elsevier, vol. 123(3), pages 617-645.
    10. Croce, Mariano M. & Marchuk, Tatyana & Schlag, Christian, 2022. "The leading premium," SAFE Working Paper Series 371, Leibniz Institute for Financial Research SAFE.
    11. Roşu, Ioanid, 2019. "Fast and slow informed trading," Journal of Financial Markets, Elsevier, vol. 43(C), pages 1-30.
    12. Jun Li, 2019. "Explaining Momentum and Value Simultaneously," Management Science, INFORMS, vol. 64(9), pages 4239-4260, September.
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    15. Enoch Cheng & Clemens C. Struck, 2019. "Time-Series Momentum: A Monte-Carlo Approach," Working Papers 201906, School of Economics, University College Dublin.
    16. Croce, Mariano & Schlag, Christian & Marchuk, Tatyana, 2018. "The Leading Premium," CEPR Discussion Papers 12631, C.E.P.R. Discussion Papers.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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