Brigham Young University - Department of Economics
Jayant V. Ganguli
University of Essex - Department of Economics
Philipp K. Illeditsch
University of Pennsylvania - Finance Department
August 8, 2012
We study how information about an asset affects optimal portfolios and equilibrium asset prices when investors are not sure about the model that predicts future asset values and thus treat the information as ambiguous. We show that this ambiguity leads to optimal portfolios that are insensitive to news even though there are no information processing costs or other market frictions. In equilibrium, we show that stock prices may not react to public information that is worse than expected and this mispricing of bad news leads to profitable trading strategies based on public information.
Number of Pages in PDF File: 42
Keywords: Ambiguity Aversion, Knightian Uncertainty, Informational Efficiency, Information Inertia, Inattention to News, Public Information, Momentum, Predictability.
JEL Classification: D80, D81, G10, G11, G12
Date posted: June 16, 2012 ; Last revised: August 10, 2012
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