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Learning with Information Capacity Constraints

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  • Peng, Lin

Abstract

Motivated by the fact that investors have limited time and attention to process information, this paper provides a continuous-time equilibrium model to analyze the effects of a capacity constraint in the learning process of a representative investor, who optimally allocates her information capacity across multiple sources of uncertainty. Consequently, the cross-sectional structure of information and the resulting asset price dynamics are determined endogenously. The model provides implications on both consumption behavior and the cross-sectional differences in price informativeness in terms of supply of information, speed of price adjustments to fundamental shocks, and price reactions to firm disclosures.

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  • Peng, Lin, 2005. "Learning with Information Capacity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 307-329, June.
  • Handle: RePEc:cup:jfinqa:v:40:y:2005:i:02:p:307-329_00
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