Index Investing and Asset Pricing under Information Asymmetry and Ambiguity Aversion

44 Pages Posted: 17 Jan 2017 Last revised: 8 Apr 2019

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Chong Huang

University of California, Irvine - Paul Merage School of Business

Siew Hong Teoh

University of California, Irvine - Accounting Area

Multiple version iconThere are 2 versions of this paper

Date Written: April 6, 2019

Abstract

In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have non-zero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions as well as market values, all investors hold the same portfolios as in the economy without model uncertainty and thus engage in index investing. So RAMP improves participation and risk sharing. Asset alphas are zero with RAMP as pricing portfolio. RAMP can be implemented by a fund of funds even if no single manager has sufficient knowledge to do so.

Keywords: index fund, index investing, CAPM, Information Asymmetry, ambiguity aversion

JEL Classification: G11, G12, D84

Suggested Citation

Hirshleifer, David A. and Huang, Chong and Teoh, Siew Hong, Index Investing and Asset Pricing under Information Asymmetry and Ambiguity Aversion (April 6, 2019). Available at SSRN: https://ssrn.com/abstract=2898992 or http://dx.doi.org/10.2139/ssrn.2898992

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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