Measuring Private Information in a Rational Expectations Framework

This paper assesses the extent of stock asymmetric information by considering the relationship between stock returns and prices. We generalize Grossman, Sanford J. and Joseph E. Stiglitz model (1980) in a multi-asset setting and show that larger asymmetric information engenders stronger, negative correlation between assets' returns and prices. We propose an asymmetric information measure called AIM,which exploits this result. The empirical analysis shows that common stocks with higher AIM exhibit superior returns, confirming that investors require a premium for information risk. These results are robust to asset pricing models, asymmetric information measures, analyses periods, and variables known to affect stock returns