JIANG WANG INTERTEMPORAL ASSET PRICES 253 rational investors,fixed stock supply and possibilities of risky production.Furthermore, we have restricted the stock to be the only security traded in the market.12 Assumption 5.There are two types of investors in the economy:the informed and the uninformed.(t)={D,,P,II,:st}is the informed investors'information set at time t andg"(t)=[D,,P,:st}is the uninformed investors'information set.Let w be the fraction of the uninformed investors. Assumption 6.The structure of the economy is common knowledge. By Assumption 5,we have assumed that investors'information about the state variables can be imperfect.'3 In addition,we allow investors to differ in their information about the economy.The informed investors have perfect private information about the state variable II,while the uninformed investors have no private information.All investors observe the price of the stock and dividends.Although the informed investors do not directly observe the equilibrium price reveals it to them.14 Hence,in the rest of the paper we will utilize this effective equivalence:(t)=[D,,P,II,:t}= {D,,P,II,,,Tst}.Given the structure of the market and the economy,P and D are not sufficient to reveal the value of II and to the uninformed investors.Therefore, information asymmetry persists in equilibrium. The variable @the fraction of uninformed investors,is the key parameter in our model in characterizing the information structure.It captures both imperfect information and asymmetric information.When @=0,all investors are informed and have perfect information about the state of the economy.When @=1,all investors are uninformed and have imperfect information about the economy.But there is no information asym- metry among investors.When @e(0,1),both imperfect information and asymmetric information are present in the economy and investors are heterogeneous. Assumption 7.Investors choose consumption and investment policies in order to maximize expected utilities conditioned on their respective information set, E[J u(c(T),T)dr].All investors have preferences exhibiting constant absolute risk aversion(CARA): u(c(t),t)=-e-pr-c(n) (2.4) where p is the time-impatience parameter and c(t)is the consumption rate at time t.5 The CARA preferences are assumed so that a closed-form solution to the model can be obtained.With CARA preferences,an investor's asset demand is independent of his wealth.16 This implies that the equilibrium price of the stock will be independent of the wealth distribution of the investors as well as the level of aggregate wealth.This indepen- dence greatly simplifies our problem. 12.This assumption makes the capital market dynamically incomplete in the sense of Harrison and Kreps (1979). 13.For earlier work on the optimal portfolio choice and asset prices under imperfect information,see, e.g.Merton(1971),Dothan and Feldman(1986),Detemple(1986),Gennotte(1986). 14.This is true if the equilibrium price is a monotonic function of which is the case in the linear equilibrium we consider in this paper.Also see the discussion in Section 4.Alternatively,we can assume that 6 is directly observable to the informed investors. 15.Here,we have assumed that all investors have the same risk aversion with an Arrow-Pratt measure of 1.This is because we want to focus solely on the effect of information on stock prices.This assumption can be easily relaxed as long as we remain in the CARA class.See the discussion in Section 7. 16.With CARA utility,negative consumption and negative wealth are possible.In this paper,we do not impose non-negativity constraints to rule out negative wealth