Learning with Information Capacity Constraints

Lin Peng

Journal of Financial and Quantitative Analysis, 2005, vol. 40, issue 2, 307-329

Abstract: Motivated by the fact that investors have limited time and attention to process information, this paper provides a continuous-time equilibrium model to analyze the effects of a capacity constraint in the learning process of a representative investor, who optimally allocates her information capacity across multiple sources of uncertainty. Consequently, the cross-sectional structure of information and the resulting asset price dynamics are determined endogenously. The model provides implications on both consumption behavior and the cross-sectional differences in price informativeness in terms of supply of information, speed of price adjustments to fundamental shocks, and price reactions to firm disclosures.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:40:y:2005:i:02:p:307-329_00

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