Public Information, Speculation and the Pattern of Asset Returns

This paper develops a simple multiperiod rational expectations model of speculation with asymmetric information among market participants in order to assess the impact of public information on stock returns. Like the few previous models of rational speculation in a dynamic setting, it is consistent with capital gains to informed.traders, positive trading volume, and autocorrelated returns. Noisy announcements account for mixtures of distributions of stock returns. Expected information releases reduce liquidity before announcement dates, and this is reflected in more negative returns autocorrelation.