Index Investing and Asset Pricing under Information Asymmetry and Ambiguity Aversion

David Hirshleifer, Chong Huang and Siew Hong Teoh

No 24143, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have nonzero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP), whose weights depend on information precisions as well as market values, all investors hold the same portfolios as in the economy without model uncertainty and thus engage in index investing. So RAMP improves participation and risk sharing. Asset alphas are zero with RAMP as pricing portfolio. RAMP can be implemented by a fund of funds even if no manager individually has sufficient knowledge to do so.

JEL-codes: F3 G11 G12 G14 G15 G4 G41 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mic and nep-upt
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.nber.org/papers/w24143.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:24143

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w24143

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().