Factor Investing, Learning from Prices, and Endogenous Uncertainty in Asset Markets
58 Pages Posted: 10 Nov 2020 Last revised: 30 Jun 2021
Date Written: October 31, 2020
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: Suggested Citation