The relationship between risk and expected returns with incomplete information

Asset pricing theory generally assumes perfect markets and, therefore, asset pricing models disregard the possibility of information deficiency in stock price formation. Our study analyses if the quantity of information about an asset determines its return. More precisely, we want to know if there is a systematic source of information related risk that makes assets which are highly sensitive to this risk factor present higher mean returns. Our results indicate that the market prices the disinformation risk. We find that models which incorporate our attention factor perform better than the traditional CAPM or the Fama and French model, both in time-series analyses and cross-sectionally.