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Information Inertia

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  • Jayant Ganguli

    ()

  • Scott Condie
  • Philipp Karl Illeditsch

Abstract

We study how information about an asset affects optimal portfolios and equilibrium asset prices when investors are not sure about the model that predicts future asset values and thus treat the information as ambiguous. We show that this ambiguity leads to optimal portfolios that are insensitive to news even though there are no information processing costs or other market frictions. In equilibrium, we show that stock prices may not react to public information that is worse than expected and this mispricing of bad news leads to profitable trading strategies based on public information.

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Bibliographic Info

Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 719.

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Date of creation: 19 Sep 2012
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Handle: RePEc:esx:essedp:719

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