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Common Factors, Information, and Holdings Dispersion

Author

Listed:
  • Patrice Fontaine
  • Sonia Jimenez-Garcès
  • Mark S Seasholes

Abstract

We derive closed-form solutions for asset prices and portfolio holdings when agents have asset-specific information and/or information about common components that affect many assets. Our solutions are general, encompass existing information structures, and are used to analyze new structures. A given investor’s portfolio can exhibit highly disperse holdings—e.g., portfolio weights may vary significantly from market capitalization weights. Our model also generates large ranges of asset prices due to information asymmetries. We help explain why US investors (e.g.) may underweight German stocks (e.g.) on average, but overweight a particular German stock relative to its market capitalization weight.

Suggested Citation

  • Patrice Fontaine & Sonia Jimenez-Garcès & Mark S Seasholes, 2018. "Common Factors, Information, and Holdings Dispersion," Review of Finance, European Finance Association, vol. 22(4), pages 1441-1467.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:4:p:1441-1467.
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    File URL: http://hdl.handle.net/10.1093/rof/rfx030
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    More about this item

    Keywords

    Information economics; Holdings dispersion; Home bias;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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