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of the American Finance Association for useful comments, especially, Geert Bekaert, Jacinta
BibTeX
@MISC{Toulouse_ofthe,
author = {Bruno Biais Toulouse and Peter Bossaerts},
title = {of the American Finance Association for useful comments, especially, Geert Bekaert, Jacinta},
year = {}
}
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Abstract
We analyze theoretically and empirically the implications of heterogeneous information for equilibrium asset pricing and portfolio choice. Our theoretical framework, directly inspired by Admati (1985), implies that with partial information aggregation, portfolio separation fails, buy-and-hold strategies are not optimal, and investors should structure their portfolios using the information contained in prices in order to cope with winner's curse problems. We implement empirically such a price-contingent portfolio allocation strategy and show that it outperforms economically and statistically the passive/indexing buy-and-hold strategy. We thus demonstrate that prices reveal information, in contrast with the homogeneous information CAPM, but only partially, consistent with a Noisy Rational Expectations Equilibrium. The success of our pricecontingent strategy does not proxy for the success of trading strategies based purely on historical performance, such as momentum investment.
Keyphrases
geert bekaert useful comment american finance association partial information aggregation passive indexing buy-and-hold strategy theoretical framework pricecontingent strategy historical performance portfolio choice trading strategy momentum investment equilibrium asset pricing price reveal information curse problem price-contingent portfolio allocation strategy buy-and-hold strategy heterogeneous information portfolio separation homogeneous information capm noisy rational expectation equilibrium
