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

59 Pages Posted: 10 Nov 2020 Last revised: 23 Nov 2020

See all articles by Chukwuma Dim

Chukwuma Dim

Frankfurt School of Finance & Management

Francesco Sangiorgi

Frankfurt School of Finance & Management gemeinnützige GmbH

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: October 31, 2020

Abstract

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

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

Francesco Sangiorgi

Frankfurt School of Finance & Management gemeinnützige GmbH ( 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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