Brigham Young University - Department of Economics
Jayant V. Ganguli
University of Essex - Department of Economics
Philipp K. Illeditsch
University of Pennsylvania - Finance Department
August 11, 2015
We study how aversion to ambiguity about the predictability of future asset values and cash flows affects optimal portfolios and asset prices. We show that optimal portfolios do not always react to new information even though there are no information processing costs or other market frictions. Moreover, the equilibrium price of the market portfolio does not always incorporate all available public information that is worse than expected. This informational inefficiency leads to price underreaction consistent with momentum.
Number of Pages in PDF File: 56
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 12, 2015
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