Testing Asymmetric-Information Asset Pricing Models

We provide evidence for the importance of information asymmetry in asset pricing by using three natural experiments. Consistent with rational expectations models with multiple assets and multiple signals, we find that prices and uninformed demand fall as asymmetry increases. These falls are larger w...

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Bibliographic Details
Published in:The Review of financial studies 2012-05, Vol.25 (5), p.1366-1413
Main Authors: Kelly, Bryan, Ljungqvist, Alexander
Format: Article
Language:English
Subjects:
Asset pricing
Asymmetric information
Asymmetry
Brokerages
Earnings forecasting
Economic theory
Expected returns
Experiments
Financial portfolios
Industrial market
Information asymmetry
Investment returns
Investors
Liquidity
Market prices
Model testing
Modeling
Pay-off
Rational expectations
Return on investment
Stock prices
Stock shares
Studies
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Summary:We provide evidence for the importance of information asymmetry in asset pricing by using three natural experiments. Consistent with rational expectations models with multiple assets and multiple signals, we find that prices and uninformed demand fall as asymmetry increases. These falls are larger when more investors are uninformed, turnover is larger and more variable, payoffs are more uncertain, and the lost signal is more precise. Prices fall partly because expected returns become more sensitive to liquidity risk. Our results confirm that information asymmetry is priced and imply that a primary channel that links asymmetry to prices is liquidity.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhr134