Advance Information and Asset Prices

Rui A. Albuquerque, Jianjun Miao
2008 Social Science Research Network  
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
more » ... lated to current fundamentals. When the information materializes, the stock price reverts back to its long run mean mimicking an overreaction pattern. . The usual disclaimer applies.
doi:10.2139/ssrn.1096691 fatcat:wodtctwc5bbe3bmpj4kpbkiquu