Rational Inattention and Portfolio Selection

Huang, Lixin; Hong, Liu

doi:10.1111/j.1540-6261.2007.01263.x

Cited by 170 publications

(92 citation statements)

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“…As a proxy for foreign returns, I look at several foreign stock indices: the "EAFE ", that comprehends returns to stocks in Europe, Australasia and Far East; 14 "Europe" corresponds to stocks in developed economies in Europe; 15 "Japan" and "Canada" are composed of stocks from these two countries, respectively; and "Emerging Markets" comprehend stocks from emerging market economies. 16 Table 1 reports annualized logarithmic returns, volatilities and covariances for the foreign-countries indices underneath column "Parameters".…”

Section: Assessing the Level Of …Xed Costs That Justify Non-participamentioning

confidence: 99%

Foreign Stock Holdings: The Role of Information

Nechio

2011

SSRN Journal

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The household …nance literature documents a large fraction of the population not participating in stock markets. It is also puzzling that a much greater share of households do not participate in foreign stock markets. Recent empirical evidence points towards the role of information in determining agents'portfolio choices. I test these results into a model that incorporates information on agents' portfolio allocation decision. Departing from Abel at al (2007), consumers can invest in foreign stocks, in addition to domestic ones. To update their information set, agents have to pay a cost implying that consumers update their portfolio only infrequently. In addition, to account for the initial costs of acquiring information about stock investments, a version of the model also features an entry-cost to be paid at the …rst period by agents that decide to enter stock market. Agents that invest in foreign stocks are more attentive, updating their portfolio more frequently. After calibrating the model to match returns and volatility for the U.S. economy and di¤erent foreign stock investments, I obtain that the minimum entry cost necessary to drive households completely out of stock markets is large (and in line with the equity premium puzzle literature). However, once agents already invest in domestic stock markets, the minimum cost that would drive investors out of foreign stocks market is much smaller. The size of the latter minimum entry cost depends on model parameters assumptions, and small variations on risk aversion and uncertainty about foreign asset returns can make this entry cost small enough to rationally justify the substantial non-participation in foreign stock markets. JEL classi…cation codes: G11, G14, G15

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Section: Assessing the Level Of …Xed Costs That Justify Non-participamentioning

confidence: 99%

Foreign Stock Holdings: The Role of Information

Nechio

2011

SSRN Journal

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“…Huang and Liu (2007) show that rational inattention may cause the representative investor to over-or underinvest. Furthermore, the optimal trading strategy is myopic with respect to future information choices.…”

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“…The current paper falls in the latter category, with the specialists in the economy paying a monetary cost out of their own wealth for observing more precise external signals. The information choice setting in this paper is closest to Detemple and Kihlstrom (1987) and Huang and Liu (2007).…”

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confidence: 99%

“…While both of these papers take the dynamics of asset prices in the economy as given and study the optimal portfolio choice problem of an investor faced with information acquisition costs, Huang and Liu (2007) solve the date zero optimal information choice while Detemple and Kihlstrom (1987) allow the agent in the economy to dynamically update his information choice. Huang and Liu (2007) show that rational inattention may cause the representative investor to over-or underinvest.…”

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Information Acquisition and Financial Intermediation

Boyarchenko

2012

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper considers the problem of information acquisition in an intermediated market, where the specialists have access to superior technology for acquiring information. These informational advantages of specialists relative to households lead to disagreement between the two groups, changing the shape of the intermediation-constrained region of the economy and increasing the frequency of periods when the intermediation constraint binds. Acquiring the additional information is, however, costly to the specialists, making them less likely to decrease their risky asset holdings when the intermediation constraint binds. I show that this behavior leads the equity capital constraint to bind more frequently, making asset prices in the economy more volatile. I fi nd empirical evidence consistent with these predictions.

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“…The investor can buy the illiquid stock at the ask price S This form of utility function is consistent with a linear fee structure predominantly adopted by mutual fund companies and is also commonly used in the literature (e.g., Carpenter (2000), Basak, Pavlova, and Shapiro (2006)). As in Huang and Liu (2007), generalization to the class of hyperbolic absolute risk averse utility is straightforward.…”

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confidence: 99%