A Theory of Asset Prices Based on Heterogeneous Information

Abstract

We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation

Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims

“…The main difference of our paper from the above literature is that we allow for multiple assets, general payoff distributions, and contingent claims. Albagli, Hellwig, and Tsyvinski (2013) consider an REE with risk-neutral investors and limits to arbitrage in the form of position limits, and hence their work is different from our no-arbitrage model. Our paper is also related to the literature that studies the informational role of nonredundant derivatives.…”

Real economy effects of short-term equity ownership

“…Our work also considers information aggregation effects amongst investors. Albagli et al (2011) develop a rational expectations model of information aggregation in asset markets and demonstrate that this can lead to corporate distortions. Their model is fundamentally different in that the firm has no control over the information environment whereas in our study the Board can send a signal to investors through its business decisions.…”

Financial reporting and market efficiency with extrapolative investors

“…In a setting in which the mass of such investors would be stochastic, the inference that rational traders could make from the price would be imperfect. As Albagli, Hellwig and Tsyvinski [1] show, in a setting with trading constraints, prices may depart from fundamentals even when informed investors employ standard Bayesian reasoning.…”

“…A typical regulatory response would be to impose tighter disclosure requirements on firms while at the same time attempting to "educate" investors, if possible. 1 Another kind of response may instead rely on market forces, hoping that the competition to attract investors would discipline firms and lead to market efficiency.…”