Information Acquisition and Portfolio Under-Diversi¯Cation

39 Pages Posted: 3 Nov 2008

See all articles by Stijn Van Nieuwerburgh

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Date Written: May 2005

Abstract

We solve the problem of an investor who chooses which assets' payoff to acquireinformation about before making an investment decision. Investors specialize becauseinformation has increasing returns: As an investor learns more about an asset, itbecomes less risky and more desirable to hold; as he holds more of the asset, the value of information about it increases. Investors hold some fraction of their assets in a well diversified fund, about which they learn nothing, and hold the other fraction in a small set of highly-correlated assets that they specialize in learning about. In equilibrium, ex-ante identical investors acquire different information. Information is a strategic substitute because assets that many investors learn about have low expected returns. The theory can explain the empirical evidence that individual investors hold part of their equity portfolio in diversified mutual funds and the rest in a small number of highly-correlated assets. While such portfolios may appear under-diversified, they are optimal for investors who face constraints on how much information they can acquire.

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Acquisition and Portfolio Under-Diversi¯Cation (May 2005). NYU Working Paper No. FIN-04-025, Available at SSRN: https://ssrn.com/abstract=1294474

Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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