Dynamic portfolio choice and asset pricing with differential information
This paper presents a multi-asset intertemporal general equilibrium model of portfolio selection and asset pricing with differential informaion.A method of Sargent(1991) is used to resolve the 'infinite regress' problem in information extraction and to derive a rational expections equilibrium. The model shows that rational investors trade stocks strategically according to their perceptions about economic states and provides a rationale for investors to hold less than perfectly diversified portfolios. The information distribution among investors has an important e¤ect on stock prices, welfare, and the investment opportunities of investors. The model helps explain a number of interesting
financial regularities such as imperfect portfolio diversification and home bias.