The purpose of this paper is to examine the implications of asymmetric information for price evolution and investor behavior under a rational expectations framework.
The author presents a simple asymmetric information‐based asset‐pricing model to show that private information and its revelation can generate price momentum. To empirically test this implication of the model, Easley et al.'s probability of information‐based trade (PIN) is used as a proxy for private information.
High PIN firms are found to have larger magnitudes of momentum effect even after controlling for size. The abnormal returns are both economically and statistically significant, and cannot be explained by the Fama‐French factors.
This study provides both an information‐based theory to explain the momentum anomaly and empirical support for the theory.
