Traditional asset pricing models based on fully revealing equilibria have been unable to explain the observed level of the equity premium in the United States without implausibly high risk aversion. I show that when those models are adjusted to reflect the effect of private information about...

I show that for a partly revealing financial equilibrium in which some agents have private information about their own preferences or endowments and about the payoff of a risky asset, traditional (fully revealing) asset pricing models understate the riskiness of equity investments....