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Portfolio choice, attention allocation, and price comovement

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  • Mondria, Jordi

Abstract

This paper models the attention allocation of portfolio investors. Investors choose the composition of their information subject to an information flow constraint. Given their expected investment strategy in the next period, which is to hold a diversified portfolio, in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal. When investors use this private signal to update information about two assets, changes in one asset affect both asset prices and may lead to asset price comovement. The model also has implications for the transmission of volatility shocks between two assets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 5 (September)
Pages: 1837-1864

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:5:p:1837-1864

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Rational inattention Asset pricing Portfolio choice;

References

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  1. Laura L. Veldkamp, 2006. "Information Markets and the Comovement of Asset Prices," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 823-845.
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  13. Kallberg, Jarl & Pasquariello, Paolo, 2008. "Time-series and cross-sectional excess comovement in stock indexes," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 481-502, June.
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  16. Peng, Lin, 2005. "Learning with Information Capacity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 307-329, June.
  17. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  18. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  19. Robin Greenwood, 2008. "Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1153-1186, May.
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