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Differential Information and Security Market Equilibrium

Published online by Cambridge University Press:  06 April 2009

Christopher B. Barry  and
Stephen J. Brown
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 4 , December 1985 , pp. 407 - 422
Copyright
Copyright © School of Business Administration, University of Washington 1985

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