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Information Choice, Uncertainty, and Expected Returns
[A noisy rational expectations equilibrium for multi-asset securities markets]

Author

Listed:
  • Charles Cao
  • David Gempesaw
  • Timothy T Simin
Abstract
We investigate how information choices affect equity returns and risk. Building on an existing theoretical model of information and investment choice, we estimate a learning index that reflects the expected benefits of learning about an asset. High learning index stocks have lower future returns and risk compared to low learning index stocks. Analysis of a conditional asset pricing model, long-run patterns in returns and volatilities, other measures of information flow, and the information environment surrounding earnings announcements reinforce our interpretation of the learning index. Our findings support the model’s predictions and illustrate a novel empirical measure of investor learning.

Suggested Citation

  • Charles Cao & David Gempesaw & Timothy T Simin, 2021. "Information Choice, Uncertainty, and Expected Returns [A noisy rational expectations equilibrium for multi-asset securities markets]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5977-6031.
  • Handle: RePEc:oup:rfinst:v:34:y:2021:i:12:p:5977-6031.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa146
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    Citations

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    Cited by:

    1. Yin, Libo & Bai, Ruxue, 2023. "China's diversification discount: The role of the information environment," International Review of Financial Analysis, Elsevier, vol. 88(C).
    2. De Gennaro Aquino, Luca & Sornette, Didier & Strub, Moris S., 2023. "Portfolio selection with exploration of new investment assets," European Journal of Operational Research, Elsevier, vol. 310(2), pages 773-792.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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