Equilibrium asset pricing and portfolio choice under asymmetric information

Biais, B., Bossaerts, P. & Spatt, C. (2010). Equilibrium asset pricing and portfolio choice under asymmetric information. Review of Financial Studies, 23(4), pp. 1503-1543. doi: 10.1093/rfs/hhp113

[img]
Preview
Text - Published Version
Available under License Creative Commons Attribution Non-commercial.

Download (341kB) | Preview

Abstract

We analyze theoretically and empirically the implications of information asymmetry for equilibrium asset pricing and portfolio choice. In our partially revealing dynamic rational expectations equilibrium, portfolio separation fails, and indexing is not optimal. We show how uninformed investors should structure their portfolios, using the information contained in prices to cope with winner's curse problems. We implement empirically this price- contingent portfolio strategy. Consistent with our theory, the strategy outperforms economically and statistically the index. While momentum can arise in the model, in the data, the momentum strategy does not outperform the price-contingent strategy, as predicted by the theory.

Item Type: Article
Additional Information: © The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact journals.permissions@oup.com
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/19094

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics