Information Asymmetry, Market Participation, and Asset Prices
53 Pages Posted: 29 May 2016
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.
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