Information Inertia

56 Pages Posted: 16 Jun 2012 Last revised: 12 Aug 2015

Scott Condie

Brigham Young University - Department of Economics

Jayant V. Ganguli

University of Essex - Department of Economics

Philipp K. Illeditsch

University of Pennsylvania - Finance Department

Date Written: August 11, 2015

Abstract

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.

Keywords: Ambiguity Aversion, Knightian Uncertainty, Informational Efficiency, Information Inertia, Inattention to News, Public Information, Momentum, Predictability

JEL Classification: D80, D81, G10, G11, G12

Suggested Citation

Condie, Scott and Ganguli, Jayant V. and Illeditsch, Philipp K., Information Inertia (August 11, 2015). Available at SSRN: https://ssrn.com/abstract=2084683 or http://dx.doi.org/10.2139/ssrn.2084683

Scott Condie

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States

Jayant V. Ganguli

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Philipp K. Illeditsch (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3477 (Phone)

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