Factor Investing, Learning from Prices, and Endogenous Uncertainty in Asset Markets
59 Pages Posted: 10 Nov 2020 Last revised: 23 Nov 2020
Date Written: October 31, 2020
We use an endogenous information model with correlated assets to study learning and uncertainty under the factor investing paradigm. As investors shift attention away from firms towards systematic risk factors, firms’ stock prices become less informative. This loss of price information increases systematic uncertainty, which incentivizes learning about the systematic risk. This learning complementarity leads to multiple regimes in systematic uncertainty and attention allocation. Empirically, we specify and estimate a model-based, forward-looking measure for investor attention to systematic versus firm-level information. Consistent with the model, the measure follows a regime-switching process. The high-level regime is linked to lower stock price sensitivity to firm-specific information and a higher systematic risk concentration.
Keywords: information acquisition, attention allocation, factor investing, endogenous uncertainty, amplification, strategic complementarity
JEL Classification: G11, G12, G13, G17
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