INFORMATION AND PRICING OF ASSETS

Continuous time financial models assume that the state vector which characterizes the instantaneous motion of the economy, is perfectly known. Observable quantities however are unlikely to constitute the state. They should be viewed as messages which signal about an unknown underlying state variable. This research takes explicit account of information processing on behalf of agents, in order to construct a dynamic theory of asset pricing. Both the case of public and heterogeneous information are investigated, in Gaussian structures. In a multiperiod economy with CARA tastes, fixed supply of the risky asset, and where agents value terminal wealth, the rational expectations equilibrium (R.E.E.), when information is homogeneous, is linear in the conditional mean and variance of the uncertainty, given the common observation. When traders have differing observations, there exists a fully revealing R.E.E. which is unique in the class of linear price functions. These results are generalized in an equilibrium model with profit maximizing firms. In the full communication economy, there exists a continuous, positive and bounded equilibrium pricing function. Its arguments are wealth, and the conditional mean and variance. It is unique in stationary as well as non stationary function spaces. When information is heterogeneous, a R.E.E. exists if the solution to the pooling economy is invertible. In continuous time economies, separation, Merton\u27s multibeta model, and Breeden\u27s consumption based model hold. The mutual funds are the portfolios with highest correlation with the conditional mean processes. Betas are impacted not only by observations, but also by the precision of the information structure which has deterministic incremental motion. In a continuous time general equilibrium setting, valuation formulas in the form of partial differential equations are developed. In two specific cases, a fully revealing R.E.E. is exhibited. Finally equilibrium in capital markets is reexamined, when constant stochastic returns to scale technologies are available. Breeden\u27s relationships between the interest rate, consumption and production are generalized to the informational case