Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information

Bruno Biais; Peter Bossaerts; Chester Spatt

doi:10.1093/rfs/hhp113

Equilibrium Asset Pricing and Portfolio Choice Under Asymmetric Information

Bruno Biais^1,2; Peter Bossaerts^3,4; Chester Spatt⁵

¹ Centre National de la Recherche Scientifique · ² Université Fédérale de Toulouse Midi-Pyrénées · ³ California Institute of Technology · ⁴ École Polytechnique Fédérale de Lausanne · ⁵ Carnegie Mellon University

Review of Financial Studies 2010 open access

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.

DOI: 10.1093/rfs/hhp113
Volume: 23 (4)
Pages: 1503-1543
Language: en
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