Conservative Holdings, Aggressive Trades: Ambiguity, Learning, and Equilibrium Flows

Abstract

We propose an equilibrium asset pricing model in which agents learn about the parameters that drive economic fundamentals and have different confidence in their estimates. We first show that, when agents are averse to parameter uncertainty, learning about the volatility of fundamentals has a first-order effect on portfolio flows: uncertainty-averse agents increase their risky asset holdings in periods of high uncertainty, despite holding conservative portfolios. We then show that subjective risk premia increase following both unexpected good and bad news. These predictions are consistent with observed portfolio flows of retail and institutional investors around dividend surprises. Our model highlights that heterogeneity of preferences and learning about volatility of fundamentals are key channels for understanding the equilibrium dynamics of portfolio flows and risk premia following news about economic outcomes.

Keywords: Ambiguity, uncertainty, learning, portfolio flows, equilibrium asset prices, heterogeneous agents

JEL Classification: G11, G12