Factor Investing, Learning from Prices, and Endogenous Uncertainty in Asset Markets

58 Pages Posted: 10 Nov 2020 Last revised: 30 Jun 2021

See all articles by Chukwuma Dim

Chukwuma Dim

Frankfurt School of Finance & Management

Francesco Sangiorgi

Frankfurt School of Finance & Management

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: October 31, 2020

Abstract

We study learning and uncertainty under the factor investing paradigm using an endogenous information model with correlated assets. As investors shift attention from firms towards systematic risk factors, stock prices become less informative, increasing systematic uncertainty and incentivizing learning about the systematic risk. This learning complementarity leads to multiple regimes in systematic uncertainty and attention allocation. We specify and estimate a model-based, forward-looking measure of 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

Suggested Citation

Dim, Chukwuma and Sangiorgi, Francesco and Vilkov, Grigory, Factor Investing, Learning from Prices, and Endogenous Uncertainty in Asset Markets (October 31, 2020). Available at SSRN: https://ssrn.com/abstract=3722541 or http://dx.doi.org/10.2139/ssrn.3722541

Chukwuma Dim

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://sites.google.com/view/chukwumadim/

Francesco Sangiorgi

Frankfurt School of Finance & Management ( email )

Adickesallee 34
Frankfurt am Main, 60322
Germany

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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