Heterogeneous Information, Informed Trading and Capital Asset Pricing

The liquidation value of risky asset generally consists of multiple fundamentals, only some aspects of which could be acquired by traders. This paper, based on noisy rational expectations model, assumes that the liquidation value of risky asset is composed of two fundamentals and that there are two types of informed traders, each of whom has private information on one fundamental respectively. We draw three conclusions. Firstly, there exists unique linear equilibrium. Secondly, when the responsiveness of one type informed traders to private information is less (more) than a certain number, the other type would resort to strategic substitutability (complementarity) in the use of information. And lastly, the expected utility of informed trader in the equilibrium is influenced both by its ratio and the precision of private information, and is negatively related to its ratio and nonlinear related to the precision of private signals.