Information Acquisition and Portfolio Under-Diversification

37 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: September 2005

Abstract

We develop a rational model of investors who choose which asset payo®s to acquire informa-tion about, before forming portfolios. Scale economies in information acquisition lead investors to specialize in learning about a set of highly-correlated assets. Knowing more about these assets makes them less risky and more desirable to hold. Bene¯ts to specialization compete with bene¯ts to diversi¯cation. The resulting asset portfolios appear under-diversi¯ed from theperspective of standard theory, but are optimal. In equilibrium, information is a strategic substitute because assets that many investors learn about have low expected returns. Increasing returns, combined with strategic substitutability leads ex-ante identical investors to specialize in di®erent information, and hold different portfolios. Information choice rationalizes investingin a diversified fund and a set of highly-correlated assets, an allocation observed in the data but usually deemed anomalous.

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Acquisition and Portfolio Under-Diversification (September 2005). NYU Working Paper No. SC-AM-05-08, Available at SSRN: https://ssrn.com/abstract=1294627

Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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