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

52 Pages Posted: 29 Apr 2022 Last revised: 25 Aug 2023

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: August 24, 2023

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

Suggested Citation

Dangl, Thomas and Garlappi, Lorenzo and Weissensteiner, Alex, Conservative Holdings, Aggressive Trades: Ambiguity, Learning, and Equilibrium Flows (August 24, 2023). Available at SSRN: https://ssrn.com/abstract=4089250 or http://dx.doi.org/10.2139/ssrn.4089250

Thomas Dangl (Contact Author)

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Alex Weissensteiner

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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