Common factors, information, and holdings dispersion

Patrice Fontaine, Sonia Jimenez-Garces, Mark Seasholes

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)1441-1467
Number of pages27
JournalReview of Finance
Volume22
Issue number4
DOIs
StatePublished - Jul 1 2018

Keywords

  • Holdings dispersion
  • Home bias
  • Information economics

ASJC Scopus subject areas

  • Finance

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