Dynamic portfolio choice and asset pricing with differential information

✍ Scribed by Chunsheng Zhou

• Publisher: Elsevier Science
• Year: 1998
• Tongue: English
• Weight: 207 KB
• Volume: 22
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(97)00099-7

✦ Synopsis

This paper presents a multi-asset intertemporal general equilibrium model of portfolio selection and asset pricing with differential information. A method of Sargent (1991) is used to resolve the 'infinite regress' problem in information extraction and to derive a rational expectations equilibrium. The model shows that rational investors trade stocks strategically according to their perceptions about economic states and provides a rationale for investors to hold less than perfectly diversified portfolios. The information distribution among investors has an important effect on stock prices, welfare, and the investment opportunities of investors. The model helps explain a number of interesting financial regularities such as imperfect portfolio diversification and home bias.