Information Asymmetry, Market Participation, and Asset Prices

53 Pages Posted: 29 May 2016

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Chong Huang

University of California, Irvine - Paul Merage School of Business

Siew Hong Teoh

UCLA Anderson School of Management

Date Written: May 1, 2016

Abstract

We derive a separation theorem: investors hold a common risk-adjusted market portfolio regardless of their information sets, and a portfolio based upon their private signals. This implies that investors have non-negligible holdings of assets they know little about, so nonparticipation remains a puzzle in a rational information setting. In contrast with the well-known prediction of a risk premium for nonparticipation, in our model risk premia satisfy the CAPM. Investors hold a fund that provides the risk-adjusted market portfolio, even if they are unaware of the fund’s composition. In contrast with a literature on information risk, there is no risk premium for information asymmetry.

Suggested Citation

Hirshleifer, David A. and Huang, Chong and Teoh, Siew Hong, Information Asymmetry, Market Participation, and Asset Prices (May 1, 2016). University of Miami, School of Business Administration, 6th Miami Behavioral Finance Conference, 2016, Available at SSRN: https://ssrn.com/abstract=2785756

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chong Huang

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

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