03002cam a22003017 4500001000700000003000500007005001700012008004100029100002000070245014100090260006600231490004200297500001800339520155100357530006101908538007201969538003602041690008802077690011202165690012702277690005702404700002402461700002102485710004202506830007702548856003802625856003702663w17548NBER20160630020313.0160630s2011 mau||||fs|||| 000 0 eng d1 aAlbagli, Elias.12aA Theory of Asset Pricing Based on Heterogeneous Informationh[electronic resource] /cElias Albagli, Christian Hellwig, Aleh Tsyvinski. aCambridge, Mass.bNational Bureau of Economic Researchc2011.1 aNBER working paper seriesvno. w17548 aOctober 2011.3 aWe 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 of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE44 - Financial Markets and the Macroeconomy2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class. 7aG14 - Information and Market Efficiency • Event Studies • Insider Trading2Journal of Economic Literature class. 7aG30 - General2Journal of Economic Literature class.1 aHellwig, Christian.1 aTsyvinski, Aleh.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w17548.4 uhttp://www.nber.org/papers/w1754841uhttp://dx.doi.org/10.3386/w17548