Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information
Bruno Biais, Peter Bossaerts, Chester Spatt
Review of Financial Studies | OXFORD UNIV PRESS INC | Published : 2010
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..View full abstract
We gratefully acknowledge the financial support from the Institute for Quantitative Research in Finance, a Moore grant at the California Institute of Technology, and the Swiss Finance Institute and the Financial Markets and Investment Banking Value Chain Chair, sponsored by the Federation Bancaire Francaise.