Index Investing and Asset Pricing Under Information Asymmetry and Ambiguity Aversion

45 Pages Posted: 28 Dec 2017

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: December 2017

Abstract

Ambiguity aversion alone does not explain the market nonparticipation puzzle. We show that in a rational expectations equilibrium model with a fund offering the risk-adjusted market portfolio (RAMP), ambiguity averse investors hold the fund and an information-based portfolio, and thus participate in all asset markets, directly or indirectly. This result follows from a new separation theorem which states that an investor’s equilibrium portfolio can be decomposed into components, each matching the optimal portfolio based on only one information source (price versus private signal). Asset risk premia satisfy the CAPM with the fund as the pricing portfolio.

Suggested Citation

Hirshleifer, David A. and Huang, Chong and Teoh, Siew Hong, Index Investing and Asset Pricing Under Information Asymmetry and Ambiguity Aversion (December 2017). NBER Working Paper No. w24143. Available at SSRN: https://ssrn.com/abstract=3092991

David A. Hirshleifer (Contact Author)

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

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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