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Information InertiaScott CondieBrigham Young University - Department of Economics Jayant V. GanguliUniversity of Essex - Department of Economics Philipp K. IlleditschUniversity of Pennsylvania - Finance Department August 8, 2012 Abstract: 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 working papers seriesDate posted: June 16, 2012 ; Last revised: August 10, 2012Suggested CitationContact Information
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