56 Pages Posted: 16 Jun 2012 Last revised: 12 Aug 2015
Date Written: 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.
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: Suggested Citation