Learning with Information Capacity Constraints
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.
Volume (Year): 40 (2005)
Issue (Month): 02 (June)
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