Becker Friedman Institute

Research Repository

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Information Inertia

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.

Authors: 
Philipp Illeditsch, University of Pennsylvania
Scott Condie, Brigham Young University
Jayant Ganguli, University of Essex
Publication Date: 
January, 2013
BFI Initiative: 
Publication Status: