Differential Information and Security Market Equilibrium

Christopher B. Barry, Stephen J. Brown

Research output: Contribution to journalArticleResearchpeer-review

365 Citations (Scopus)

Abstract

We propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parameters of alternative securities. In contrast with earlier work, we show that parameter uncertainty, or estimation risk, can have an effect upon market equilibrium. Under reasonable conditions, securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured, ceteris paribus. The initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions. We provide theoretical support for the empirical examination of at least three proxies for relative information: period of listing, number of security returns observations available, and divergence of analyst opinion.

Original languageEnglish
Pages (from-to)407-422
Number of pages16
JournalJournal of Financial and Quantitative Analysis
Volume20
Issue number4
DOIs
Publication statusPublished - 1 Jan 1985
Externally publishedYes

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