A Model of Intertemporal Asset Prices Under Asymmetric Information

By Jiang Wang. 2011

682 citations recorded by the source corpus.

This paper presents a dynamic asset-pricing model under asymmetric information. Investors have different information concerning the future growth rate of dividends. They rationally extract information from prices as well as dividends and maximize their expected utility. The model has a closed-form solution to the rational expectations equilibrium. We find that existence of uninformed investors increases the risk premium. Supply shocks can affect the risk premium only under asymmetric information. Information asymmetry among investors can increase price volatility and negative autocorrelation in returns. Less-informed investors may rationally behave like price chasers.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8c7b8be50f17a2b98d8fba8cdad097a520bd35de

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Citations in the corpus

Differences in herding: Individual vs. institutional investors (2017, positive): “Under asymmetric information, less-informed investors may rationally behave like price chasers (Wang, 1993, 1994).”
Structural Breaks, Incomplete Information, and Stock Prices (2001, background): “Wang (1993) suggested asymmetry of information between noise traders and rational investors, which leads uninformed traders to rationally behave like price chasers.”
Asset Prices with Heterogeneity in Preferences and Beliefs (2014, neutral): ““when risk aversion is heterogeneous, SDF [stochastic discount factor] is the solution to highly non-linear equation (1) [in their paper], and no explicit solution is possible, except for some very special values of risk aversion; see, for example, Wang (1996).””
Does More Information in Stock Price Lead to Greater or Smaller Idiosyncratic Return Volatility (2011, neutral): “, p253 in Wang (1993).”
Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information (2010, methodology): “10 There is an additional complexity arising in Wang (1993), but not in the present analysis. We assume the informed agents observe a signal on the next cash flow, which is then publicly observed. Wang (1993) assumes that informed agents observe the stochastically evolving mean of the cash-flow proc”
Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries (2007, positive): “8 As clearly illustrated by Lo and Wang (2000), the trade-off here is between not imposing too much structure on the data by detrending and conducting meaningful statistical inference.”
A Rational Expectations Model of Financial Contagion (2002, neutral): “In these models, the financial sectors of some countries become fragile due to poor government policies and due to financial market imperfections that generate overinvestment and excessive borrowing from abroad (Corsetti, Pesenti, and Roubini, 1998, and Rigobon, 1998).”
Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations (2008, neutral): “, and Wang, X. (2004). The Sarbanes-Oxley act and firms’ going-private decisions.”
Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility (2009, neutral): “…more sophisticated approach is to let agents receive private signals, as in the vast “Noisy-Rational Expectations” literature originating from the work of Grossman and Stiglitz (1980), Hellwig (1980) and Wang (1993), in which agents learn also from price, a channel that is not present in our model.”
Entrepreneurial Finance and Nondiversifiable Risk (2009, neutral): “Merton (1971), Grossman (1976) and Wang (1993) ).”
Ambiguity, Learning, and Asset Returns (2009, background): “Our second motivation is related to the robustness theory developed by Hansen and Sargent (2001) and Hansen (2007). Specifically, the agent in our model may fear model misspecification in the consumption process.”
Analysts’ Forecasts and Asset Pricing: A Survey (2016, neutral): “15 A related stream of research uses a rational expectations equilibrium framework that links information asymmetry to asset prices by lowering demand from uninformed traders (e.g., Grossman and Stiglitz (1980), Hellwig (1980), Admati (1985), and Wang (1993)).”
Adverse Selection and the Required Return (2004, background): “(1999) show that real investments in capital are affected by adverse selection, and Diamond and Verrecchia (1991), Wang (1993) , and Easley and O’Hara (2000) find that asymmetric information leads to imperfect risk sharing, resulting in reduced prices [see also Akerlof (1970) and Hendel and Lizzeri”